The article about President Bush's plan to allow certain homeowners to refinance into Federal Housing Administration-insured mortgages incorrectly said that Bush endorsed a bill that would change tax law so that homeowners would not have to pay taxes on debt that their creditors forgive. The president said that he could support the bill with some changes.
Bush's Plan Brings FHA To Mortgage Front Line
Saturday, September 1, 2007
President Bush's plan yesterday to stem the rise of mortgage defaults put the spotlight on the Federal Housing Administration, which steadily lost relevance in recent years as more-aggressive private lenders came to dominate the marketplace.
Bush said yesterday that some subprime, or high-risk, borrowers would for the first time be able to refinance into loans insured by the FHA starting next week. He said the "government has got a role to play" in helping homeowners struggling to hold onto their homes.
The president's speech helped dissolve some of the partisan tension between congressional Democrats and administration officials, who have clashed on how to best respond to a mortgage crisis that surfaced last year when an alarming number of subprime borrowers started missing their monthly payments. Yesterday, several Democratic lawmakers said Bush had not acted boldly or swiftly enough, but they praised him for taking this action.
"This move has diminished what has been an ideological divide between us," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "The administration's view was that the market alone would take care of these problems, and our view was that we needed increased institutional participation in the near term."
Bush singled out the popularity of adjustable-rate mortgages with subprime borrowers as "one of the most troubling developments." Such mortgages start with low introductory rates that later rise sharply. As the higher rates kick in, some borrowers are caught by surprise and miss payments.
The FHA will offer those subprime borrowers the option of refinancing into loans it insures, but only if they made payments on time for six months before their loans reset to higher rates and their mortgages reset between June 2005 and December 2009.
The FHA does not make loans; it provides mortgage insurance to borrowers through a network of private lenders. Those lenders will consider only borrowers who have at least 3 percent equity in their homes and who can verify their incomes, a practice that often fell by the wayside in recent years as many lenders relaxed their standards.
The program, called FHA-Secure, is not a bailout for lenders who made bad loans or speculators who let their properties lapse into foreclosure when they could not flip them quickly, the president said. To avoid rewarding speculators, the FHA measure will not cover vacation homes or other homes in which borrowers do not live.
"It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford," Bush said.
Jared Bernstein, a senior economist at the Economic Policy Institute, said the effect of the agency's program would be marginal for the economy but extremely relevant to those it helps.
By FHA estimates, the refinancing program will draw 60,000 delinquent borrowers in fiscal 2008. An additional 20,000 will come through a separate program, also announced yesterday, that would lower the cost of insurance premiums for homeowners who are less of a credit risk. That program would take effect in January 2008 and bring the number of FHA customers to 240,000.
For now, the FHA charges the same premiums to all borrowers regardless of risk. The premiums have provided it with reserves, now totaling $22 billion, to cover defaults. No public money is involved. By insuring loans, FHA makes its mortgages more affordable for borrowers and less risky for lenders.