Bush to Offer Proposals To Ease Mortgage Crisis

By Neil Irwin and Dina ElBoghdady
Washington Post Staff Writers
Friday, August 31, 2007

The Bush administration today will propose a set of policies meant to help ease the wave of mortgage defaults, according to senior administration officials. It is the administration's first broad effort to deal with the rising number of home foreclosures, which are widely forecast to increase in the next year.

President Bush and Treasury Secretary Henry M. Paulson Jr. will propose changes to the Federal Housing Administration mortgage insurance program that would allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages, which offer low introductory rates that can later rise, sometimes doubling a monthly payment.

People who have missed mortgage payments are now ineligible for FHA insurance. In the president's plan, they would be eligible if they fall behind only because the amount they are required to pay each month increases, as is now happening with many mortgages issued from 2004 to 2006.

The officials said the administration can make the change without congressional approval, but other details will require legislation.

Officials expect that 2 million mortgages made to risky, or subprime, borrowers will adjust upward in the next two years, with a total value of more than $500 billion.

"They need to have had a good payment history up to the point of the reset," said a senior administration official, who spoke on the condition of anonymity because the plan had not been announced. The official estimated that the change would allow 80,000 more homeowners to receive federally insured mortgages in 2008 on top of the 160,000 already projected to use the program.

The FHA does not make loans, it insures them. That helps lower the cost of mortgages for borrowers and makes the loans less risky for lenders. The agency has $22 billion in reserve to cover defaults. No taxpayer money is involved; the reserves are made up of premiums paid by borrowers.

Democrats in Congress and campaigning for president have criticized the administration for failing to act as the mortgage situation worsened, calling in particular for an increase in the number home buyers eligible for FHA loans. Consumer groups yesterday called the proposals a significant step in the right direction.

"This opens up a whole new channel to borrowers," said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. "The administration has been under a lot of pressure from Congress to step forward with a plan for homeowners. A lot of the focus has been on liquidity and improving the situation for investors and lenders, and this is the first major step forward to address the problems of homeowners."

When prices soared during the housing boom, homeowners essentially bet that they could sell their homes for a profit or refinance their way out of trouble if they anticipated problems with their mortgages. But when prices began to soften, as they have in many parts of the country, the refinancing option vanished for many.

The administration's plan would make FHA loans available to people with worse credit histories, though with higher insurance premiums to cover the increased risk.

And the administration would ease a requirement that people refinancing into an FHA insured loan must have 3 percent equity in their houses. That way, people who are upside down on their mortgages -- meaning they owe more than the house is worth -- can still refinance into an FHA mortgage.

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