Bush Wants FHA to Help Refinance Troubled Subprime Borrowers

In looking for ways to address rising foreclosures, the Bush administration is turning to the Federal Housing Administration to provide subprime borrowers with a refinancing option.

The Bush administration has supported reform legislation to modernize the FHA single-family program so it could serve more subprime borrowers.

Now they want FHA to throw a lifeline for drowning subprime borrowers.

"We are considering a way to help certain subprime borrowers refinance into FHA loans," FHA commissioner Brian Montgomery said last week.

Over the past two months funding for subprime loans has dried up and borrowers with adjustable-rate 2/28 mortgages facing resets are finding it difficult, if not impossible, to refinance into a lower interest rate loan.

Federal banking regulators are urging servicers to work with borrowers facing resets and try to modify or restructure their mortgages to make the monthly payments more affordable.

Legislators, regulators and industry officials also realize that the resets on subprime ARMs are going to stretch into in 2008 and foreclosure rates are already at a 37-year high. "The bulk of the (reset) problem is ahead of us," FDIC chairman Sheila Bair said.

John Mauldin, president of an advisory firm Millennium Wave Investments, has charted the amount of resets for each month in 2007 and 2008. He expects the largest wave of resets w ill occur in the first half of 2008 and involve $521 billion in mortgages.

In his August newsletter, Mr. Mauldin points out there have been $197 billion in ARM resets so far this year. "This is less than we will see in two months (February and March) of next year," he said. His charts show that resets will total $88 billion resets in February and $110 billion in March.

Over the past few weeks, Treasury Department and the Federal Reserve Boards officials have been busy to calm jittery investors and to keep the credit markets from seizing up.

But last week Treasury secretary Henry Paulson acknowledged that is "no quick solution" to the problems in the credit markets and it is going to take time to work out all the excesses and bad lending practices of the past few years.

He also revealed that the administration is considering ways to help homeowners facing foreclosure.

"We are really focused on the homeowners who are in danger of losing their homes and thinking about policy options to address that segment of the market," Secretary Paulson said during an interview on CNBC-TV.

It was learned later that Treasury is working with FHA on a refinancing plan that the agency could implement administratively.

Back in April, the National Association of Realtors petitioned the Department of Housing and Urban Development to amend its regulations so that FHA could refinance delinquent borrowers.

But HUD officials put the request on the backburner as they concentrated on lobbying Congress to pass the FHA reform legislation. Congress left town for its August recess without passing FHA legislation.

Now FHA is drafting a mortgagee letter that would open the door to refinancing subprime borrowers that have been current on their monthly payments up to the time of the reset.

FHA could roll some missed payments into the new loan, but they cannot go above a 97.75% loan-to-value ratio.

In most cases, lenders are going to have to write down the loan amount and take a loss so the borrower can fit into a FHA loan. One consultant said many lenders would be more than willing to take a writedown to cut their losses.

In addition, borrowers have to meet FHA credit standards and debt-to-income ratios. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com/

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