FHA's Expanded Role in Resolving the Housing Crisis

Rep. Barney Frank, D-Mass., who chairs the House panel, said many were surprised at how deeply problems in the subprime mortgage market hurt other markets. He couldn't have been more correct in his assessment. The subprime mortgage market hurt, and the pain was felt worldwide.

Many investors worldwide stopped buying bonds backed by mortgages that do not conform to the standards followed by Fannie Mae and Freddie Mac. The two government-sponsored entities (GSEs) buy home loan debt, and their bonds are considered second only to Treasury notes and bonds in terms of safety. As a result, the stock market took a huge nose-dive and is now just barely beginning to recover, and only because the federal government has taken such drastic steps to help the financial industry recover.

Alex Pollock, a resident fellow at the American Enterprise Institute and former CEO of the Federal Home Loan Bank of Chicago, said, "The FHA used to be the dominant mortgage provider" for subprime borrowers, so it is the "obvious, sensible place" for lawmakers to try to stem the subprime fallout.

In the 1990s, FHA-backed loans accounted for about 12% of the market. But as subprime lenders pushed the envelope, the FHA's share has fallen to about 3%.

In the first quarter of 2007, the new foreclosure rate was 0.9% for FHA loans vs. 2.43% for subprime. The lower foreclosure rate suggests the FHA provides "more forbearance or mitigation" than sub-prime lenders, Pollock said.

The Bush administration was able to see that this crisis required strong government intervention. It was the only way to work on turning things around and stop the continued cycle of investor fear and declining home prices.

"It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford," Bush said in late August. "Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders, or a little help from their government."

Now, more and more are backing President George Bush's recent legislation to expand the role of the Federal Housing Administration (FHA). Two pieces of legislation were passed this year to rescue troubled borrowers with high-risk subprime adjustable rate mortgages (ARMs) and exotic hybrid ARMs (interest-only and negative amortization loans): FHASecure and HOPE for Homeowners.

FHASecure expires on December 31, 2008. But, HOPE for Homeowners began on October 1, 2008. Under the HOPE for Homeowners Act of 2008, new mortgages that are offered by FHA-approved lenders will refinance abusive loans at a significant discount for homeowners facing difficulty meeting their mortgage payments. The HOPE for Homeowners, also known as the H4H program, makes it possible for certain homeowners to refinance their existing mortgages with a 30-year, fixed-rate FHA loan of up to 90% of their home's value. It provides any current or delinquent borrowers with debt-to-income ratios higher than 31 percent the opportunity to refinance their existing mortgage into a 30-year, fixed-rate loan through FHA. The program is available to those who have government loans and conventional prime loans, as well as Alt-A loans and the worrisome subprime loans. This includes most types of mortgages, including hybrid ARMs (e.g., negative amortization, payment option and interest only mortgages).

The following are some important considerations for the HOPE for Homeowners program:

• The original loan must originate prior to January 1st, 2008.
• Payment to income is limited to 31 percent while debt to income is limited to 43 percent. These numbers may be higher, according to the program, following a three-month trial modification put in place through the program first.
• There is a maximum loan of $550,440 on all loans through the HOPE for Homeowners program.
• There is also a restriction of a 90 percent loan to value in place on these loans.
• All homes must be owner occupied homes, on one unique property.
• FHA approved appraisers must appraise the properties within three months prior to the closing
• Origination fees are capped at 1 percent
• Buyers do not pay closing costs and prepaid items upfront
• A 3 percent upfront mortgage insurance premium and annual premium up to 1.5 percent will be applicable.
• Any state or federal fraud conviction within the last ten years can disqualify an individual from obtaining the loan.

The aim of HOPE for Homeowners and other government foreclosure rescue plans is to reduce and reverse the tide of foreclosures that keep driving housing prices down. It's meant to get to the core of the problem-the subprime meltdown that caused the spreading foreclosure problem. Other government interventions have been implemented to help the financial industry recover the damage inflicted to banks worldwide. But, until the housing crisis is resolved, the economy cannot recover. Once banks start lending to other banks, and eventually to consumers again, the economy will be on the road to recovery. But until then, FHA is the home owner's best option to avoid foreclosure.