Loan Modification

?New? Initiatives From The FHA?

By Peter G. Miller

Over the weekend there were big doings in Washington. Duel demonstrations on the anniversary of the “I have a Dream” speech by Dr. Martin Luther King showcased many of the divisions which continue to separate our political thinking.

Meanwhile, on CNN’s “State of the Nation,” HUD Secretary Shaun Donovan told interviewer Candy Crowley that “we’re going to be rolling out an FHA mortgage refinancing effort to help borrowers who are under water in their homes get above water. And second, we’re launching an emergency homeowners’ loan program for unemployed borrowers to be able to stay in their homes.”

This is all good stuff. It’s also all old stuff and unworkable stuff.

The idea of using an FHA mortgage to help underwater conventional borrowers dates back to President Bush. As he explained in August 2007, “in the coming days the FHA will launch a new program called FHA-Secure. This program will allow American homeowners who have got good credit history but cannot afford their current payments to refinance into FHA-insured mortgages. This means that many families who are struggling now will be able to refinance their loans, meet their monthly payments and keep their homes. In other words, we’re going to start reaching out and making sure people know that this option is available to them so they can stay in their homes.”

Actually, FHASecure has been over and done for some time. It managed to refinance 4,110 delinquent conventional mortgages with new FHA financing. Now, according to RealtyTrac, we have more than 300,000 foreclosure filings per month so it’s hard to see the FHASecure effort as anything but a flop.

More recently, we have the August 6th announcement of a new FHA loan for underwater borrowers, the short refi. As our Gina Pogel wonderfully explains, this program will go nowhere because of the way it’s designed.

However, if we take the Secretary literally — “we’re going to be rolling out an FHA refinancing effort to help borrowers who are under water in their homes get above water” — then we’re in a fresh world of huh? How is that going to happen?

Underwater

Let us give Sec. Donovan credit for being enthusiastic, however there are very few politically-acceptable options to help borrowers “get their homes above water.”

An “underwater” borrower is someone with a loan balance that is larger than the value of the property. Thus, if Smith bought for $300,000 with 5 percent down he took out a $270,000 mortgage. If the property is now worth $250,000 the loan amount is less than the value of the property.

We could “help” Smith by giving him $20,000 to reduce his mortgage balance, but that would be very irritating to the people who are making their payments and put more down in the first place. No less important it’s possible that the value of Smith’s home will continue to plummet.

The real problem here is that while Smith may owe more than the house is worth, if he is making his payments then he has a “performing” loan. For lenders there is no issue. Smith borrowed money he is now repaying which is what he should be doing.

Here’s an idea: Mr. Secretary the housing market seemed to have hit bottom and had even begun to rise in some areas as a result of the tax credit for first-time buyers. Alas, qualifying contracts under the program ended April 30th. Instead of doing something complex, let’s go back to a program that worked and had wide public support.

Let’s re-start the first-time homebuyer tax credit. If demand increases, prices will rise and Smith will be either less underwater or not underwater at all.

Full post as published by FHA Mortgage Guide on August 30, 2010 (boomark / email).