Middle Tennessee Real Estate

FHA Loans May Get a Boost

I received this today from Billy Carver, a lender with Pinnacle Financial Partners in Smyrna, TN:

Dems Want To Help Borrowers By Boosting FHA Loan Program
Monday March 19, 7:00 pm ET
By Jed Graham

With subprime mortgage defaults and foreclosures on the rise, Congress is ready to get tough on "predatory" lenders. But some industry experts warn that new laws to curb aggressive lending practices could worsen the subprime credit crunch and raise the risk of foreclosures. So where will borrowers with shaky credit turn? Possibly to the federal government.

At the same time that lawmakers are looking to restrain subprime lending, they also want to loosen restrictions at the Federal Housing Administration, which backs loans for borrowers with modest incomes.

"We need to expand the role of the FHA to issue more mortgages at better rates," Sen. Hillary Clinton, D-NY, said last week.

The Bush administration also supports steps to revitalize the New Deal-era agency. It backed a bill last year that would have eliminated the minimum 3% down payment requirement for FHA loans. The bill easily passed the House, but stalled in the Senate.

Easing restrictions at the FHA might help future borrowers, but wouldn't do much for those in danger of defaulting. But last week the National Community Reinvestment Coalition urged Congress to rewrite FHA rules to let the agency refinance subprime loans in default.

"As this crisis worsens, mortgage tsunamis will ravage working-class neighborhoods across this country," said John Taylor, NCRC president.

Taylor's ideas for FHA intervention and "a national rescue fund" may be well received on Capitol Hill. Senate Banking Committee Chairman Christopher Dodd, D-Conn. said Monday he asked executives at five big subprime lenders to testify at a Thursday hearing, along with financial regulators.

Dodd said last week that he "will use all the powers and tools at my disposal to keep families victimized by predatory loans in their homes."

Bloomberg News reported last week that Dodd said a few billion dollars in aid "may be a lot less costly" than $164 billion in lost wealth due to foreclosures.

The $164 billion figure came from a report by the Center for Responsible Lending, which projected the cost of foreclosures on subprime loans made from 1998 to 2006.

While subprime lenders are going bankrupt or tightening standards, and regulators have issued more restrictive guidance, Congress also appears likely to act.

"We're going to pass a bill that will substantially diminish the likelihood of people being given loans that they should not be given," Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, said last week.

Legislation proposed by Rep. Carolyn Maloney, D-N.Y., would require lenders to consider the ability of borrowers to pay back mortgages after a "teaser" introductory rate expires.

Federal regulators proposed guidelines earlier this month along the same lines, instructing lenders to assess how borrowers could cope with payments once higher rates kick in.

Clinton said she would also "propose a stop to prepayment penalties designed to trap borrowers."

Lawmakers seem to be following "the typical pattern" in targeting aggressive lending practices, said Alex Pollock, a resident fellow at the American Enterprise Institute and former CEO of the Federal Home Loan Bank of Chicago.

Once the mistakes have become clear, then you clamp down on them when the market is already going down and push it further down," Pollock said.

But at the same time, Clinton wants to raise the $363,000 limit on FHA-backed mortgages to help buyers in more expensive markets.

The FHA doesn't lend directly, but it provides a guarantee that encourages lenders to give decent rates to borrowers they might otherwise shun. Back in the 1990s, FHA-backed loans accounted for about 12% of the market.

But as subprime lenders have pushed the envelope, the FHA's share has fallen to 3%. While the new foreclosure rate on subprime loans hit 2% in the fourth quarter, the rate was just 0.93% for FHA loans. But the delinquency rate was about the same: 13.46% for FHA loans vs. 13.33% for subprime. The data suggest the FHA provides "more forbearance or mitigation" than subprime lenders, Pollock said.

Delinquencies on prime mortgages were just 2.57% in the fourth quarter, with new foreclosures at 0.24%. Would the government take on undue risk by allowing the FHA to refinance loans in default? Not necessarily, as long as the original lender had to take a substantial haircut, Pollock said.

Ronald Utt, senior research fellow at the Heritage Foundation, said an expanded FHA role is unwarranted. "One could only marvel," he said, when Congress "sees a disaster sweeping through financial markets and tries to figure out how it can be a part of it."

Lowering the minimal down-payment requirements would attract borrowers who are "living on the edge," thereby putting the program at risk, Utt said. As Congress tackles the subprime sector, it's also weighing tougher regulations for Fannie Mae and Freddie Mac. The government-supported firms inject liquidity by investing in mortgages and bundling them into securities.

The Federal Reserve and the Bush administration have argued that Freddie and Fannie are so large that they present a systemic risk to the broader economy. Both firms have said they will facilitate loans that would help rescue borrowers faced with sharply rising payments they can't afford. They've also warned that Congress could exacerbate weakness in the housing market if it puts restrictions on how the firms deploy capital.

Labels: Federal government, Loans

posted by Kathy T. @ 8:44 AM