FHA Relaxes Rules of Program for Troubled Homeowners

By Dina ElBoghdady
washington Post Staff Writer
Thursday, November 20, 2008

The Federal Housing Administration yesterday said that after less than two months it is relaxing terms of a program designed to help troubled mortgage borrowers because so far the effort has not been effective.

The announcement builds on the Bush administration's push to have FHA play an expanded role in stemming foreclosures. The administration also intends the changes to bolster an argument against the need for a different mortgage modification plan floated by the Federal Deposit Insurance Corp., according to an administration official who spoke on condition of anonymity.

"When you have a plan a day you create confusion in the marketplace. . . . We've got to determine if there are ways to enhance the efforts that we've already taken," the official said.

FHA officials said the changes, which will take effect in a few weeks, should make it easier for borrowers to refinance into more affordable fixed-rate, government-backed mortgages. To be eligible for the program, dubbed Hope for Homeowners, borrowers must prove that they cannot afford their current loan, that they have made at least six payments on it and that they have not intentionally missed a payment, among other requirements.

Housing and Urban Development Secretary Steve Preston said many lenders expressed interest in the program, launched Oct. 1. But they retreated because guidelines were too onerous. During the first month of the program, FHA received applications from lenders for only 111 borrowers.

"Few lenders have actually signed up, and few borrowers have submitted applications," Preston said in speech at the National Press Club yesterday.

The trouble is that the most distressed borrowers need to have their existing lenders forgive part of their debt to qualify for a new FHA loan, something lenders have resisted.

Currently, FHA will insure a loan for only 90 percent of the home's value. With housing values plunging, many borrowers have no equity left in their homes, meaning lenders would take a substantial hit under this arrangement. Yesterday's changes increase that to 96.5 percent, thus reducing the potential loss for lenders.

FHA also addressed an obstacle for the large chunk of borrowers who took out two loans to finance their home. Currently, lenders who hold the smaller second loan must release their liens before borrowers can qualify for a new loan. But they often refuse to do so, knowing there would be little -- if any -- money left for them if the mortgage were modified.

Now, FHA will offer the second loan holders an immediate payment in exchange for releasing their liens, Preston said.

The agency will also allow lenders to extend the life of a loan from 30 years to 40 years to help reduce a borrowers' monthly payments.

Guy Cecala, publisher of Inside Mortgage Finance, said these were changes the FHA could make without Congressional legislation. But it's unclear if they will boost the program's popularity.

Some borrowers are put off by requirements that would force them to share future appreciation on their homes with the government. Some lenders are waiting to see if the government will come up with a more attractive plan such as the one suggested by the FDIC.

"The feeling among lenders is if they wait, maybe a better option will come down the pike," Cecala said. "It's not helping the [FHA] program to have the FDIC plan lingering out there."

Several lending industry groups voiced their approval for this plan, as did Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, although he said more steps can be taken to improve participation.

Washington Post staff writer Binyamin Appelbaum contributed to this report.

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