FHA Refinancing Effort Gets Underway

Washington-The Department of Housing and Urban Development has launched a special Federal Housing Administration refinancing program mandated by Congress in July as part of a major housing bill, but is unclear how many troubled homeowners it will help.

HUD has not provided an estimate on how many borrowers will be able to take advantage of the Hope for Homeowners program, which requires lenders to write down the loan amount to a 90% loan-to-value ratio and most likely pay the 3% upfront mortgage insurance premium.

"For families struggling to keep up with their mortgage payments, this program will be another resource to refinance into a loan they can afford," HUD secretary Steve Preston said.

The HUD secretary also noted there are other workout options, including the Expanded FHA Secure program that allows lenders to refinance delinquent borrowers.

Lenders/servicers can also decide to modify loans on their own. The private Hope Now initiative has completed 2.3 million workouts since it was launched last year.

"There are other alternatives that are robust and will probably handle the lion's share of the volume," Mr. Preston told reporters last week.

Bush administration officials and congressional supporters of the H4H program seem to be aware the refinancing program may be too restrictive and they have already incorporated several important changes into a $700 billion financial rescue package bill that Congress passed on Oct. 3. President George Bush signed the Emergency Economic Stabilization Act the same day.

The provisions inserted in the emergency bill are expected to make the H4H program more attractive for lenders and easier to pay off second-lien holders who can make it difficult to refinance the first mortgage.

"The provisions in the bill could really make this program work," said mortgage consultant Brian Chappelle of Potomac Partners here.

First, the new law will allow the Hope oversight board to increase the maximum LTV ratio above 90%, which would reduce the amount of the write down.

Second, the rescue bill allows the oversight board to pay off second-lien holders with cash. Currently, the second-lien holders can only share in future appreciation of the property once it is sold.

Secretary Preston told reporters that those changes "may encourage more lenders to come into the program." However, it will take "some time" to incorporate the changes into the underwriting guidelines and HUD will probably have to issue a proposed rule for public comment.

Under the H4H guidance issued by HUD on Oct. 1, homeowners with mortgage payment-to-income ratios above 31% who are struggling to make their payments can qualify for FHA refinancing.

After the lender writes down the loan amount, the borrower's payment-to-income ratio cannot exceed 31% and debt-to-income ratio cannot exceed 43%, unless there is a "minimum three-consecutive-month trial modification."

Several lenders asked for this trial period to see if the borrowers with payment-to-income ratios of up to 38% could make timely payments on a modified mortgage before writing down the principal amount of the existing mortgage. The trial period provides greater assurance that FHA will insure the new mortgage and pay claims if it goes into early default.

If someone has a very low-income level, Mr. Preston said, the 31% ratio is necessary to ensure the payments are affordable and they don't default again. "If someone has a higher income level they might be able to handle a 38%," he said, and the trial period will allow them to demonstrate their ability to make the payments.

However, lenders that don't have a servicing capacity won't be able to conduct these trials. And many expected the oversight board to raise the ratio to 38% for all refinancings. The Federal Deposit Insurance Corp. is using a 38% payment-to-income ratio in restructuring mortgages at the failed IndyMac Bank.

The Center for Responsible Lending views the Hope program as another program that takes a case-by-case approach to modifying loans.

"Anything that helps any additional person is good," said CRL spokesman Kathleen Day. But she pointed out that for every loan modification there are four foreclosures.

"We need something that can be done more quickly and more broadly," Ms. Day said. CRL is very supportive of the systematic approach to loan modifications FDIC is using at IndyMac.

One of the principal supporters of the Hope for Homeowners program, Senate Banking Committee chairman Christopher Dodd, said the new FHA refinancing program will help "hundreds of thousands" of families that are "trapped" in bad mortgages.

"I will continue to monitor very closely the effectiveness of this program in preserving homeownership," Sen. Dodd said.

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