In a recent article, David Twiddy reports and evaluates the new FHA initiatives and down payment assistance programs that were released by HUD chief.  The Housing Secretary Steve Preston said that an expanded federal home mortgage program would help thousands of struggling homeowners find more secure and more affordable mortgages. But Preston, speaking at the annual meeting of the National Association of Counties on Monday, warned that a similar plan that passed the Senate on Friday would “tie our hands,” forcing the FHA to either reduce loan services or turn to taxpayers for additional mortgage refinance options.  “We’re hoping that reason will prevail,” he said.  The Bush administration unveiled the FHA Secure program in August 2007, letting homeowners who had good credit histories, but couldn’t afford their mortgage payments after their adjustable-rate mortgages reset to a higher interest rate, refinance into mortgages insured by the FHA.  Preston said that since that program went into effect, FHA has helped with mortgage refinance loans for 265,000 homeowners.  

Beginning Monday, Preston said, the program was expanding to also offer FHA-insured mortgages to people with adjustable-rate loans who have missed three payments in the past year or who have suffered a temporary economic hardship, such as reduced income or a medical emergency.  He said the program would also encourage lenders to renegotiate the loans, such as bringing down the interest rate or principle or extending the payments.

However, the agency will now charge homeowners insurance premiums of up to 2.25 % based on their credit history.  “The change is absolutely essential for FHA to be able to expand its support and to be able to maintain fair pricing for traditional customers and to protect the American taxpayer,” Preston said, adding that he estimated the program would help 100,000 more people get refinanced.  Risk-based pricing has its critics; however, as the Senate last week included language in its foreclosure rescue package that prohibits the FHA from charging customers different interest rates. Opponents say the higher rates would disproportionately harm the poor, who would have the most to benefit from getting out of an adjustable-rate loan.  But Preston said that among FHA home loans, people with the lowest incomes tended to have the highest credit scores – a fact he attributed to banks passing on lower-income customers in favor of those with higher income.  He said that without risk-based pricing, the FHA faced several unpleasant options.

“Either we’re going to have to cut back service to these people and tell them we can’t help them anymore, we’re going to have to increase prices on all borrowers at a time when we need them in the market, or we’re going to have to ask Congress for funding, which this agency has never done in its 73-year history,” he said.  The Senate plan is by no means a done deal as it differs significantly from the House version and includes provisions opposed by President Bush.  Preston praised efforts by the FED and the Treasury Department to assist sluggish mortgage lending companies like Freddie Mac and Fannie Mae, which have seen their stock shares plummet in recent weeks as they struggled with loan defaults and falling home prices. The Fed has agreed to provide the two companies with funding for mortgage loans at reduced interest rates.  “Our markets today trade on confidence or doubt,” Preston said. “These actions take doubt off the table.”