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FHA Reform Would Help Head Off Subprime Foreclosures
Modernization of the Federal Housing Administration is needed promptly to help address the subprime mortgage problem that continues to unfold across the country, Alphonso Jackson, secretary of the Department of Housing and Urban Development, told a May 14 Homeownership Summit in Washington, D.C. on preventing borrowers from losing their homes through foreclosure.
“The President and I have been strongly encouraging Congress to pass legislation that modernizes the FHA,” Jackson said. “We need this reform now. Every day of delay places more and more home owners at unnecessary risk.”
FHA loans are providing an increasingly popular alternative for home owners who are confronting monthly payments they can’t afford after the interest rates on their adjustable rate mortgages are adjusted upward, he indicated.
However, he said, “With expanded authority to set insurance premiums commensurate with risk, FHA could potentially assist tens of thousands more borrowers who need an exit strategy from their sub-prime mortgages. Unfortunately, under today’s restricted premium limits and maximum loan amounts, FHA simply cannot reach all the borrowers who need the ‘safety net’ that FHA can provide.”
Conceding that “exotic loans are a serious challenge for us,” Jackson nevertheless said that most subprime loans remain “viable” and that subprime lending remains an important alternative for households who can not qualify for a mortgage from a prime lender — provided that it is “legal, fiscally responsible and ethical.”
Of the adjustable-rate subprime loans taken out in 2005 and 2006 and just now beginning to experience increased payments, he said that in 80% of the cases borrowers will be able to pay the loans at the new interest rates, will refinance their loans into less expensive prime-rate loans or will sell their homes.
“We remain concerned about the other roughly 20% of these subprime loans,” Jackson added. “Even borrowers with subprime loans taken out in earlier years may still experience some problems with rate and payment resets. For many, large reset rates have just kicked in. Some people are having, or will have, trouble affording the new payments. These are the loans that we must follow carefully over the next few months.”
Jackson said that housing counseling and financial education is important in the process, and cited an article by Washington Post columnist Michelle Singletary, a moderator at the housing summit, reporting that half of home owners who went into foreclose didn’t even pick up the phone to contact the lender.
The Administration has increased the budget for counseling from $13 million when it took office to $41 million now, and has requested $50 million for housing counseling grants in the coming fiscal year, he said.
In the majority of the cases, panelists at the summit said, foreclosure on subprime loans can be prevented if the home owners get in touch with their lender at the earliest sign that they expect to fall behind on their payments. (For stories in this issue on that discussion, click here and here.)
Jackson said that the exotic loan problem needs to be addressed now through FHA reform so that mechanisms will be in place to prevent foreclosures once the market returns to full strength.
Although credit for home mortgages has tightened, the housing market has not been “strangled,” he said, and a growing population and rising incomes suggest that “we can expect a future boom in housing.”
NAHB last month testified on behalf of H.R. 1852, the Expanding American Homeownership Act of 2007, which would give the FHA greater flexibility to respond to the needs of borrowers, enable more working families to become home owners and provide a viable alternative to the volatile sub-prime market.
The legislation is scheduled to go to the House floor in the coming weeks.
To read a previous NBN story on the legislation, click here.
To read the bill, click here and enter H.R. 1852 in the box at the center of the page.
For more information on the legislation, e-mail Scott Meyer at NAHB, or call him at 800-368-5242 x8144.
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