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What Can the FHA Do?

Legislation that seems likely to be enacted soon (a version recently was approved by the U.S. Senate by an 83-9 vote) will make it easier for borrowers with subprime, adjustable-rate loans to refinance into fixed-rate, government-backed mortgages. That will be a big relief for some borrowers facing potentially onerous payment resets on exotic loans.

But the Federal housing administration's help can only go so far. One of the reasons the FHA's market share has plummeted over the last decade is that many lenders found the program cumbersome to deal with. They preferred conventional mortgage products with private mortgage insurance to serve low downpayment borrowers who needed to stretch traditional underwriting standards. Also, the FHA had few backers in the early years of the Bush administration, when many conservatives in the administration and in Congress saw the FHA as competition for the private mortgage insurance industry. Not too many people mourned the FHA's decline, until the subprime market fell apart. By dollar volume, the FHA's share of the home-purchase mortgage market fell from 19% in 2006 to 6% in 2005, according to the Government Accountability Office.

Now, along with the conforming loan products purchased by the government-sponsored enterprises, the FHA is one of the few sources of mortgage liquidity in the market. And because of its emphasis on serving low to moderate income homebuyers, people who need to stretch debt-to-income ratios, and those making low downpayments, the FHA is well suited to help subprime borrowers refinance out of problem loan products.

In addition to expanding the FHA's ability to help borrowers refinance, it will also raise FHA and GSE loan limits substantially in high cost areas, something that is seen as critical in light of the way that the subprime meltdown has spilled over into the jumbo mortgage segment.

The FHA is certainly poised to play a big role in helping borrowers. But it won't help everybody. With home values falling, many borrowers will find themselves underwater and will not want to refinance into a new loan without principal relief. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/