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Paul Kiesel
Paul Kiesel
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The Paradoxical FHASecure Program

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According to an article, “Need a Better Mortgage? Call Uncle Sam,” on CNNMoney.com today, FHASecure, a Bush touted foreclosure prevention program, has helped over 200,000 homeowners remain in their homes. However, when one looks at the statistics closely, only 3000 homeowners — according to the FHA — were in “imminent” danger of losing their homes. In fact, a majority of the 200,000 homeowners helped by FHASecure were current on their payments and wanted to refinance out of high-cost loans. So the program is helping people who would receive help otherwise?

Under new rules that begin this July, to qualify for a new fixed mortgage under the FHASecure program, which will be open to all subprime borrowers (prior to or after reset), a borrower can be no more that 60 days late or 30 days late twice in a 12-month period. Other criteria: they need to have home equity, or cash, equaling 3% of the mortgage principal (but if a borrower is behind on their payment, and their home is continuing to lose value, where will the 3% come from?). In addition, “borrowers three months delinquent or late three times in a 12-month period will qualify if they have 10% home equity,” (CNNMoney.com, 5/19/08). And even if you match the aforementioned criteria, a borrower’s credit history will come into play, so if a subprime borrower has spotty credit (which many do, hence, subprime or B-paper loans; the loans are too risky to qualify for “prime” rates), regardless of their current situation, they’ll be less likely to receive a FHASecure loan.

Here’s the fallibility of FHASecure: it’s not going to help the people, subprime ARM borrowers, who need it most, at least not based on the FHASecure requirements listed above. FHASecure eventually wants to issue 500,000 new mortgages. Okay, but according to what’s been done by the program so far, the amount of people in underwater mortgages receiving help compared to those borrowers who could have received help on their own, that’ll only cover 5000-7500 loans — consisting of mortgagees that would not have been able to receive help elsewhere — to the 500,000 that FHASecure wants to issue.

Subprime ARM’s are at the center of the foreclosure crisis, even though they account for only 7% of U.S. mortgages. But subprime mortgages represent 42% of all delinquencies. Unfortunately, the Mortgage Bankers Association is not keen to the true problem behind all of the recent floods of “resets.” According to the MBA, “subprime loans come with low fixed interest rates for the first two or three years, after which they reset higher and readjust every six months.” But the MBA is misrepresenting the facts (which is easy to do with all of the numbers being thrown around from the Bush administration to Secretary Paulson to websites like AngryRenter.com), in fact many of the loans do not have “low fixed interest rates,” instead, they have low fixed interest rate payment options. The latter, which is a more accurate description, allows the borrower to make a payment based off of a 1 to 1.25 percent interest rate, when in reality they’re being charged based on a 6 to 7 percent interest rate. Therefore, they’re really only making a payment based off a fraction of the actual interest being charged, and the remaining interest that is unpaid compounds monthly, which brings the borrower to their “reset” date well before three years (reset date is either at two to three years from loan’s commencement or when the balance owed exceeds 110% of the principal amount borrowed — the latter occurs more often than not in subprime loans that inch closer towards foreclosure or are in foreclosure).

Does FHASecure really fit the role of “mortgage savior” when the program isn’t even designed to help at least 42% of the loans that are delinquent or in the foreclosure process? Either Bush, the Department of Housing and Urban Development or Secretary Paulson need to reform this plan again, or they need to come up with an alternative plan that will assist a large chunk of the borrowers caught in the foreclosure crisis (subprime borrowers in underwater mortgages or low interest rate payment options). If not, we’ll still be hearing inflated success numbers (per the mortgage/housing crisis) coming out of the White House and continue to see a slumping housing market until next year, incidentally when we have a new president.