The government's efforts to stem the tide of home foreclosures in the U.S. expanded with the recent passage of the economic stimulus package.
But, with the minimal impact that programs like FHASecure have had thus far, questions linger about how many borrowers will actually be saved by this latest initiative.
The $168 billion economic stimulus package passed by Congress and signed by President George W. Bush on Feb. 13 temporarily raised the conforming loan limits for Fannie Mae and Freddie Mac up to 125% of an area's median home price, with a maximum of $729,750. The temporary lift has been touted as a necessary dose of relief for jumbo loan borrowers in more expensive areas such as California.
"I think it will definitely help," said Morgan Brown, chief operating officer of the California-based Day Trust Mortgage. "I don't think it's a terrible step."
But like others in the industry, Brown is skeptical. With the GSEs' maximum conforming loan limit placed at 125% of the area's median home price, the weak housing market could prove a major obstacle.
"With the declining home prices being reported, when you do the calculations the number of people that are actually going to be helped is significantly less" than if the maximum was placed at the $729,750 loan price across the board, Brown said.
Steve O'Halloran, a spokesman for the U.S. Department of Housing and Urban Development, did not return a call seeking comment.
The Securities Industry and Financial Markets Association ruled on Feb. 15 that the higher balance loans will not be allowed for inclusion in the TBA-eligible pools, but will instead be securitized "under unique pool codes for trading on a specified pool basis'" or included in REMIC transactions.
"The borrowers that benefit won't get a full conforming rate, but they will get a better rate than they get now," said Art Frank, director and head of MBS research at Deutsche Bank Securities. Jumbos have recently been selling at 110 basis points - 120 basis points above conforming rates, he added, but will now be 30 basis points or 35 basis points above conforming rates.
Foreclosures exploded in the U.S. last year with roughly 2.2 million filings, up 75% over the 1.3 million recorded in 2006, according to RealtyTrac, a real estate data provider. The 642,150 filings on 527,740 properties reported for the fourth quarter were an 86% jump over the fourth quarter in 2006.
In an attempt to slow the spiraling default rate, President Bush announced the FHASecure program in August to allow a certain segment of troubled subprime borrowers to refinance into loans insured by the Federal Housing Administration. The FHA modernization steps are expected to help about 240,000 homeowners refinance and avoid foreclosure.
The program is meant to help homeowners who have good credit but who have missed mortgage payments because of rate resets. It allows these people to refinance their mortgages for next year and avoid foreclosure. The FHA is also being reformed to reach more homeowners by charging higher premiums on riskier loans but allowing more people access to the program.
Although the initiative received plaudits as a good first step to helping struggling borrowers keep their homes, others saw its expected impact as being limited. Thus far, sources said, those expectations have proven correct.
Narrow Underwriting Box
Speaking during a panel discussion at the American Securitization Forum on Feb. 5, Rod Dubitsky, a managing director at Credit Suisse, expressed disappointment with FHASecure. "So far it's fair to say the FHASecure program has been a failure for the most part," he said.
Dubitsky noted that only about 1,000 loans have been modified so far. While unimpressive up to this point, he did not discount the possibility that the program could play a crucial role in rescuing troubled homeowners.
"We have to figure out why those numbers have been so small," Dubitsky said. "FHASecure is very important because it's the only loan program that will likely be out there that will refinance a borrower with negative equity, or refinance a delinquent borrower post-reset. And because there will be more and more borrowers with negative equity, FHASecure will be the only way they can get out of it."
Dubitsky argued that two major roadblocks are preventing the program from flourishing. First, investors in FHA through the Ginnie Mae program have not shown interest in buying the loans, and without an effective market, originators are not going to make them because they are afraid they won't be able to sell them.
The other problem, Dubitsky said, is that there are many hurdles for the borrower to overcome. In other words, the "underwriting box" might be too narrow.
"Both of these are an issue, but if you first widen the box and don't address the investor problem, you might be exacerbating the investor problem to the extent that the loan becomes funkier than regular FHASecure and maybe harder to price in the secondary market," Dubitsky said.
Credit Suisse's research has shown that even borrowers who are qualified have not gotten into FHASecure because of the demand size and the restricted underwriting guidelines, according to Dubitsky. "When there are only 1,000 loans, I've got to believe that it's a much deeper issue than the borrowers are just not qualifying," he said.
Deutsche's Frank agreed that "the program got off to a pretty slow start" and noted that through the end of December, 1,280 loans had been denied by the FHA. But, he added, "I think it was designed to be limited and it certainly is limited."
Frank said that the FHA Modernization Act, which was pulled from the stimulus package under pressure from President Bush, could help FHASecure expand its reach. The modernization proposal would create a risk-based premium structure for FHA, eliminate the mandatory three-percent down payment and permanently increase and simplify the FHA loan limits.
"It's easier for FHA to reduce their credit standards if they can charge risk-based mortgage insurance premiums," Frank said. "I wouldn't blame the FHA for still maintaining some standards for the FHASecure program because if they can't increase the premiums, then it becomes very much a taxpayer-subsidized program. So that's their dilemma."
Brown, of Day Trust Mortgage, also believes the program's design might be too limited.
"Some of the limits need to be looked at," he said. "I don't think FHA should be cramming jumbos down into the program, but I do think some of the limits are restrictive and I think there is a way to loosen them without increasing a ton of risk."
Brown also contends that FHASecure has been marred by confusion over its guidelines. He said there has been a lack of education across the board, from underwriters to lenders to brokers to borrowers.
"I personally haven't been able to help anyone get qualified for that program," Brown said.
The Mortgage Bankers Association has pushed for the parameters of FHASecure to be loosened so the eligibility requirements will allow more borrowers to take advantage of the program. Corey Carlisle, senior director for residential loan production in MBA's government affairs department, said it has mostly helped borrowers turn conventional loans into FHA loans.
"And that's a good thing," he said. "But that particular case is one that was available even prior to the announcement."
The limitations of FHASecure, however, are not all the fault of the FHA, according to Carlisle. He credited the agency for taking steps to help borrowers and said the MBA has strongly lobbied Congress to pass the FHA Modernization Act.
"Traditionally, the FHA has not been known for being product innovators, or even kind of slow to bring things up to speed, and they've really moved rapidly to get [FHASecure] out the door," he said.
Robert Jaworski, a partner at Reed Smith who specializes in regulatory issues in the mortgage industry, noted that many borrowers are not qualified for FHASecure because they became delinquent on their payments not due to the reset, but because "they took out more of a loan than they could afford." He maintains that the voluntary efforts of the lenders and servicers might be more effective in the long run.
"One of the problems is if you've got people in a loan where they are paying an initial teaser rate that is good for two or three years and that teaser rate is way below market value, then they may not be able to afford the FHA loan and that's a real problem," Jaworski said. "What are you going to do in that situation? Sometimes you have let the market take care of itself."
Still, even if some market participants would rather the market work out its own problems, Jaworski said that most lenders understand the government has a role to play in repairing the broken housing market.
"I think people in the industry are realists if nothing else," he said. "They realize that there is a governmental interest here and the policymakers are going to get involved. And I think for the most part the industry has been attempting to work with the policymakers to craft solutions that will really work and that will really help. They're not sticking their heads in the sand because they cannot afford to."
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