President George Bush's proposal to allow a certain segment of subprime borrowers to refinance into loans insured by the Federal Housing Administration is being seen as a measured first step to help troubled borrowers, although one that will likely only have a limited impact. The FHA modernization steps are expected to help about 240,000 homeowners refinance and avoid foreclosure, but it is considered a drop in the bucket when more than a million loans could default.
The FHASecure program is meant to help homeowners who have good credit but who have missed mortgage payments because of increased rates. It will allow these people to refinance their mortgage 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.
Sen. Bob Casey (D-PA) credited President Bush's proposal as being "a good step," but says he wants the president to raise the portfolio caps for Fannie Mae and Freddie Mac. He also said the president is "woefully behind the curve in reigning in predatory subprime lending practices" and added, "Unscrupulous brokers are seasoned experts in manipulation and deception, and we should outlaw practices and loan features that are clearly abusive."
But Ritch Workman, president of the Florida Association of Mortgage Brokers, said he is "very afraid of politicians overreaching" in response to the subprime market woes. "We are thrilled at (President Bush's) effort because the one thing we are really afraid of is a knee-jerk legislative reaction to a capital market problem," he said. "The FHA is a good program and always has been; the problem is that it is not available to mortgage brokers. They should allow brokers to close FHA loans instead of closing their doors."
Art Frank, director and head of MBS research for Deutsche Bank Securities, says that despite the president's efforts to modernize the FHA, the bottom line is that a lot of troubled homeowners are not going to be saved. "Allowing people to refinance is going to help out a small faction of borrowers," he said. "I think the government can only help the better subprime borrowers who have done things responsibly. It's a good thing to help out that small faction, but realistically there are a lot of borrowers who can't be helped."
In a special research report released by Bear Stearns on Sept. 4, the firm wrote that the "true impact" of the FHASecure program "will be determined by how rigorous the underwriting process really is and the path of home prices." The report concluded that the "Bush Administration must walk a fine line between offering a prudent underwriting alternative for deserving subprime borrowers and a program increasingly viewed as a bailout to subprime borrowers."
Alphonso Jackson, secretary of Housing and Urban Development, denied that the program is a bailout in a question and answer session he held on Thursday. "FHASecure will promote good money management, not be a substitute for it," he said. "Borrowers will pay mortgage insurance premiums out of their own pockets to offset claims to the FHA insurance fund and ultimately prevent risk to the taxpayer."
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