FHA saddles up to help delinquent borrowers |
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FHA to adopt 'risk-based pricing'
The FHA requires refinancers to have at least 3 percent equity.
That's a problem for people whose homes have lost value, so that
they owe more than the house is worth. That's the case with a lot
of homeowners in formerly blistering housing markets, such as South
Florida, where people got mortgages for 95 percent or more of their
homes' values, only to watch those values plunge when the markets
went cold.
Jim Sahnger, mortgage consultant with Palm Beach Financial Network
in Stuart, Fla., says customers have called to ask him about FHASecure,
and he has to break the news that it won't help. "One problem
is that so many people in this area are upside down," he says.
"You've got to have something in it to make it worthwhile."
The FHA suggests that some lenders might be willing to partially
forgive debts so delinquent borrowers can meet the 3 percent threshold
and refinance their loans. While it might sound unlikely that lenders
would let borrowers off the hook like that, writing off partial
debts could be cheaper than foreclosing.
"Foreclosures are usually in bad shape," says Paul Halpern, a partner with Chrysalis Capital Partners, a private equity fund. "It makes those assets tough to sell, relatively." And lenders might choose to forgive partial debts rather than sell foreclosed houses in declining markets.
The deadline for applying under the FHASecure program will be the last day of 2008. An extension is possible, but not a sure thing.
In the meantime, FHA insurance premiums will rise
for some new borrowers, because the agency plans to adopt "risk-based
pricing" -- in essence, making riskier borrowers pay more for
insurance. The FHA has talked for years about adopting risk-based
pricing. Last year, the Congressional Budget Office reported that
"developing and maintaining the appropriate systems for managing
a risk-based pricing structure would take FHA several years to implement."
But the FHA says it can do the job in four months and offer risk-based
pricing at the beginning of 2008.
Michael Moskowitz, president of Equity Now, a New York-based mortgage lender, says "it's not such a big deal" to move to risk-based pricing with today's technology. "It's a simple thing to do, really," he says -- especially if the FHA were to buy the technology from a company such as Fannie Mae or Freddie Mac.
Anthony Sanders, professor of finance and real estate
at Arizona State University, isn't nearly so sanguine. He points
to this year's subprime meltdown, which burned a lot of sophisticated
money managers on Wall Street. "Does the Bush administration
really believe that the FHA can perform risk analysis better than
Wall Street, particularly when the FHA has not done risk-based pricing
in the past?" he says.
It's difficult to sort out the "good" from
the "bad" subprime borrowers, Sanders says -- "That
is, someone with poor credit who had a rash of illnesses and medical
bills versus someone that is just an irresponsible borrower. ...
And we are supposed to believe that the FHA is up for this game
when all others have failed?"
The FHA intends to gallop in for the rescue, despite the odds.
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