FHA saddles up to help delinquent borrowers
Page | 1 | 2 | 3 |

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.

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.