The Federal Housing commissioner testified today that expanded guidelines at the Federal Housing Administration will benefit about 500,000 subprime borrowers.
Brian D. Montgomery, assistant secretary for housing for the Department of Housing and Urban Development, said the FHASecure program has been expanded for borrowers who have been responsible with past credit, according to a transcript of his prepared testimony before the Committee on Financial Services, U.S. House of Representatives.
He said FHA will now insure loans up to 97 percent loan-to-value for borrowers with two late payments during the past 12 months. The agency will also insure 90 percent LTV loans for borrowers with up to three months of delinquency.
He explained that mortgage lenders can voluntarily write down some of the balance or carry a subordinate lien for part of the balance in order for borrowers to refinance with an FHA loan.
Montgomery said the agency is rolling out risk-based premiums pricing, which "will ensure the integrity of the FHA insurance fund over the long-term, protect the taxpayer and guarantee that FHA will be around to help struggling homeowners in the future."
"We believe that, by year's end, this new expanded version of FHASecure will reach more than a half-million homeowners," Montgomery stated. "This figure represents a substantial portion of the total universe of homeowners with subprime ARMs who are owner-occupants, have documentation to demonstrate their ability to repay the loan and are not already in foreclosure."
But he warned that mandatory write-downs, as the Senate is currently proposing, would make it impossible for a subordinate lien-holder to negotiate a short payoff and would significantly reduce the number of lenders and borrowers who would participate.
In addition, he cautioned against legislating looser underwriting guidelines that would subject FHA to too much risk. Among current Senate proposals he cited were the disregarding of some underwriting criteria by lenders and an increase in debt-to-income ratios.
He also emphasized the agency's position that seller-funded down-payment assistance needs to be prohibited because foreclosure on these loans are three times as high as loans where borrowers made the downpayments themselves.
"The administration also strongly opposes the $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes. The principal beneficiaries of this type of plan would be private lenders, who are now the owners of the vacant or foreclosed properties," Montgomery testified. "We do not believe that it is necessary to encourage mortgage holders to sell portfolios at a discount to new investors. The market does not need a government entity to play this role."
Federal Reserve Gov. Randall S. Kroszner also testified before the committee.
He noted subprime adjustable-rate 90-day delinquency stood at 24 percent in January -- double its level a year earlier, according to a transcript of his prepared testimony. He added that foreclosures on all loans reached 1.5 million last year, an increase of 53 percent over 2006, and will rise even higher this year. He said estimates of losses on foreclosed loans are in excess of 50 percent.
Kroszner suggested write-downs on loans should be limited to borrowers with high DTIs and LTVs in excess of 100 percent. But he explained it should be left up to the servicer. He said borrowers should be discouraged from quickly cashing in on a write-down by being subject to an exit fee when the loan is paid off, giving the government an interest in equity appreciation or sharing equity with the lender that wrote down the loan.
He supported risked-based FHA premiums, which will minimize the cost to taxpayers while enabling FHA to help more delinquent borrowers. He also called for lenders to be accountable for the performance of FHA refinances through either penalties, repurchase liabilities or incentives.
"An FHA-insured refinancing product with insurance priced to reflect the risks to the taxpayers might encourage servicers to consider providing delinquent, at-risk mortgage borrowers a principal write-down as a loan modification alternative," Kroszner stated.