FHA Is Proposing Help

May 12, 2007

A variety of steps are being proposed to help homeowners who can’t handle their rising payments on a subprime adjustable-rate mortgage. One proposal is for the Department of Housing and Urban Development to refinance distressed subprime borrowers into more affordable FHA loans.

This could be accomplished in a prudent way that would not be a "bailout" for lenders, according to the National Association of Realtors. HUD could waive an underwriting requirement so the FHA can refinance borrowers who are behind on the adjustable-rate mortgage payments. The proposal calls for the original lender to forgive a significant amount of the loan so FHA can refinance at a 97 percent loan-to-value ratio, reflecting the current appraised value of the property.

"This would not be a bailout for lenders since they would incur significant losses," NAR president Pat Combs said. Lenders generally lose from $20,000 to $40,000 in a foreclosure, it was noted. There would probably be considerable lender interest in this program if it were implemented, NAR said. HUD officials have made no comment on the proposal at this point. "We (NAR) believe FHA can design a mechanism where creditworthy borrowers could refinance subject to prudent guidelines and therefore avoid losing their homes," Combs said.

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