FHA saddles up to help delinquent borrowers

By Holden Lewis • Bankrate.com

As millions of homeowners lie bleeding in the Subprime Corral, the feds ride in on an old mare to rescue a few borrowers suffering from scratches.

The bailout plan, called FHASecure, is designed to prevent foreclosures among homeowners who fell behind because the rates went up on their adjustable-rate mortgages. About 60,000 "delinquent-yet-creditworthy" mortgage borrowers will be able to refinance into FHA-insured home loans in the next year or so, an official with the Federal Housing Administration says.

It's a triage operation, with the FHA aiding the delinquent borrowers who are easiest to patch up. The rescued borrowers will be dwarfed by the number of struggling homeowners who won't qualify for FHA refinances. "Unfortunately, we think there will be some families that we won't be able to help," the FHA official says.

People who refinance under the FHASecure program will end up with fixed-rate mortgages, which are quite popular nowadays among people who were burned by rising rates on ARMs. The FHA doesn't lend money; it insures mortgages made by lenders. The agency's Web site has a search engine to find FHA-approved lenders.

Key factors of the FHA bailout plan:

• FHASecure is geared toward the homeowner with an ARM who was paying on time until the rate was reset and the monthly payment went up.
• There are loan-size limits that make these mortgages unworkable for high-cost markets, such as most of California.
• Borrowers will need at least 3 percent equity, the FHA won't help people who owe more than their houses are worth.
• The application deadline is the end of 2008.

Is it déjà vu all over again?

The FHA is a 73-year-old packhorse that was foaled during the Great Depression. In 1934, foreclosures were skyrocketing, house values were plummeting, and house sales and construction were at a standstill. In those days, people got balloon mortgages that lasted for five years, and then they were expected to refinance at a new rate. In that respect, those home loans were somewhat similar to today's adjustable-rate mortgages. Like today, many homeowners back then had trouble making their payments and they couldn't find refinancing.

"The housing industry was still flat on its face with mortgage money frozen, 2 million men unemployed in the construction industry and properties falling apart for lack of money to pay for repairs," says the FHA's self-published history of its first 25 years. The FHA was created to insure mortgages, reducing the risk to lenders and making them more likely to lend. The agency carried a lot of cargo during the decades after the Depression. But after the 1980s, the FHA grew feeble. As recently as the mid-'90s, more than one-tenth of mortgages were FHA-insured; this year, its share is around one-fiftieth. As the FHA shed its burden, piggyback loans and uninsured subprime mortgages took it up.

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