Bush Administration Proposes New Foreclosure Plan
The Bush Administration proposed a new foreclosure relief plan today in response to the mortgage crisis. The plan encourages lenders to write down loans and shift risk to the government-backed FHA program.
Hoping to assist more than 100,000 homeowners, the administration announced their intention to expand the FHASecure program. The expansion will allow the FHA to insure new mortgages for struggling borrowers, including those with ARMs and those who owe more than their homes are worth.
Not everyone will qualify though. High risk borrowers and borrowers who missed more than just a couple of mortgage payments will be turned away. Approval will also depend on a lender’s willingness to write down the mortgage principal owed. The maximum amount that could be borrowed under the expanded program would be either 90 or 97 percent of the home’s value, depending on the borrower’s risk profile.
Democrats are expected to oppose the effort. They are in the midst of writing more aggressive legislation to deal with the foreclosure problem. Although their legislation also calls for expansion of the FHA program, there are a lot of other provisions in the bill.
The FHA’s Financial Woes
Although both Democrats and Republicans are looking to the FHA to rescue homeowners in trouble, there is some question as to whether or not the agency is equipped to deal with the foreclosure crisis.
By its own estimates, the FHA will be operating in the red this year. Congressional officials are projecting a $1.4 billion shortfall in fiscal 2009 for the agency. If this happens, American taxpayers will be forced to subsidize the FHA for the first time in its 74-year history.
Some housing officials are now blaming the bad ink on an FHA program that allows seller-financed down payment loans. Under the program, sellers arrange to cover buyers’ down payments. The seller concessions are generally added to the total cost of the loan.
Only 2 percent of FHA insured loans were seller-financed down payment loans in 2000, but they grew in popularity during the boom and the FHA did nothing to keep the program in check. By 2007, seller-financed down payment loans accounted for a whopping 35 percent of all FHA loans.
The problem with this is that the foreclosure rate on seller-financed down payment loans is two to three times that of other loans, putting the FHA’s portfolio in a very precarious position.
Already, the FHA backs 3.8 million loans worth approximately $365 billion. If Congress and the Bush Administration have their way, the agency will be greatly expanded. Since the FHA has a government insurance fund of only $20 billion, and statistics show that 25 percent of FHA insured borrowers go into default again after a workout, there is almost no doubt the agency will have problems handling all the loans that do end up in foreclosure.
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Comment by grandma on 10 April 2008:
This is not the first time taxpayers have bailed out FHA. In 1988 the UFMIP was added to the insurance cost of obtaining an FHA loan (a result of losses in the “oil patch” days). Purchasers & sellers, who are taxpayers, contribute those funds to HUD insurance pools. The idea has always been that the program insurance would cover losses. Issue now is whether the program can find a way to save itself (risk-based premiums are being considered.) Government subsidy is one solution that might help keep the program from pricing itself out of existence. Other solutions would continue to put pressure on home purchasers and sellers by increasing the cost of insurance.
Comment by punstress on 10 April 2008:
Call me ignorant, but how is it a down payment when the seller gives “concessions,” but then adds it back to the loan? And if it’s added to the loan, why do they call it seller-financed? The buyer is the one financing it. I don’t understand!
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Comment by lizjimbo on 18 October 2008:
I am beginning to wonder if very many people understand the true nature of the devastation that is about to be unleashed on our economy.
In 1998 I started noticing neighborhoods being built near our home with prices advertised starting in the low $300,000 range. My first thought was who could afford those prices. My wife and I enjoyed a low 6 figure income and we could afford something in the 120 range. When I say afford, i mean having 2 week vacations, a relatively new automobile, pay the bills, and still have some disposable income. Well, these neighborhoods kept popping up all over the place.
My wife is a Civil Engineer and I am a Land Surveyor. We had our own business and it was booming. We had numerous employees that were well compensated and we reinvested back in our business.
We also developed numerous aquaintances. A couple were a mortgage broker and one was a realtor. I used to look on realtor.com to see what housing prices were doing. I was stunned at how the home values were skyrocketing out of site. I couldn’t concieve of how employee compensation was keeping in step with the housing prices. All I needed to do was talk to my mortgage broker friend and/or look at all the mortgage advertising that was going thru my fax and into my email.
Liar loans, ARM’s, No doc loans, NIV loans, no interest payment loans, pay what you can loans, is he still alive loans, and so on.
Guess what Earthlings? We are headed for a worldwide financial meltdown unless the root problem is addressed. It is too late to regulate. So many people are spending time looking for the arsonist and know one is putting out the fire. Most don’t even know where the fire is.
What happens when you experience the foreclosure mess we are in. Well, a glut of vacant houses. If we have a glut, no one needs to build. If no one needs to build, then they no longer need all those people on the payroll. Those without jobs end up loosing their homes. Those without jobs don’t shop. When they don’t shop revenues in retail suffer. Then retail employees loose jobs and then loose homes creating a larger glut. What I am seeing first hand is a wildfire that is providing its own fuel. My civil engineering and land surveying revenue is down nearly 85%. My retail sales are down nearly 70%. This has taken 2 years to see it come to this. Lets add in the infationary forces of increased energy cost and we have the perfect storm brewing overhead.
The solution is not giving money to banks to lend. No one can afford another loan. Loans are what created this mess. The solution is not giving money to Wall Street to prop up retirement accounts. Some people may just have to get a job.
Not everyone that is loosing their homes or are having financial difficulty are necessarily the responsible party to their mess. If a person looses a job because some realtor wanted to jack up their commission by speculation or some mortgage broker wanted to double last months commission by giving out loans to dead people then perhaps the cause is not the person that lost his or her job.
The economy is suffering because people are out of disposable income. I say that because I have first hand witnessed the fall. The solution is simple. Get more income into the hands of the people. No, not a check from the government. Not another rediculous stimulus check that will last most people all of 5 minutes,
Try this. Reduce all existing mortgage interest rates to 4% across the board. Reduce all revolving credit card debt interest rates to 3%. Money would flow back into the economy like a breached dam. Mortgage banks would certainly get their principle as well as credit card issuers. They may get a little less on the interest side. Their choice is simple. Do I want another vacant house or Chapter 7 bankruptcy in which I get absolutely nothing except a house that may be worth less than half of what I loaned on it or should we settle for less interest.
I believe that would stimulate the economy far better than any silly tax cut, any silly bailout, or any silly loans to banks. Employment would spiral back upwards, housing sales would be back on the increase, the local and federal governments would stop loosing revenue and begin to see an increase.
Once the fire has been extinguished then immediately work on preventing another fire. Quit looking for the arsonist and put the damned fire out.
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