FHA May Aid Those

‘Underwater’ on Loans

Phil found this article for us

by Damian Paletta
From The Wall Street Journal Online
March 31, 2008
WASHINGTON — The Bush administration is considering regulatory changes to aid homeowners who owe more money on their mortgages than their homes are worth, people familiar with the proposal said.

The Department of Housing and Urban Development plan would enable homeowners who are “underwater” on their mortgages to qualify for a partial backstop through HUD’s Federal Housing Administration, these people said.

HUD Secretary Alphonso Jackson “is examining the potential for FHA to be a solution for these borrowers,” Treasury Secretary Henry Paulson said Wednesday.

The FHA is central to multiple plans to revitalize the housing market and prevent foreclosures.

Meanwhile, Democrats are trying to pass legislation that would allow the FHA to insure up to an additional $400 billion in mortgages by requiring lenders to take partial losses on loans and refinance borrowers into more affordable products. HUD’s proposal is likely to be much smaller in scale and is expected to offer partial insurance for certain borrowers, leaving lenders on the hook for some losses.

Lenders, real-estate agents, and other housing-industry officials have complained to HUD that FHA’s current framework makes it too difficult for homeowners to qualify, partly because FHA won’t accept homeowners who have missed a payment in the previous six months.

HUD’s new plan, recently submitted to the White House’s Office of Management and Budget, would allow many more people to qualify, though it still is unclear how. The OMB must review the proposal and approve it.

In an interview last week with the Washington Times, Mr. Jackson said the plan he submitted to the White House would provide partial insurance for certain loans in areas where house prices are falling.

“I just made a proposal this morning to the White House for those loans that are underwater,” Mr. Jackson said, according to the Washington Times. “We will insure 80 to 85% of the loan — give ourselves some leeway even if it falls a little more.”

HUD spokesman Stephen O’Halloran wouldn’t confirm Mr. Jackson’s comments to the Washington Times or that anything has been submitted to the White House.

“The secretary was referring to one possible idea that has been out there for some time,” he said.

HUD had $21.3 billion in its mortgage-insurance fund at the end of 2007 to protect against losses. At the end of February, the agency insured 3.8 million loans with a total unpaid balance of $364.7 billion.

HUD and the Bush administration have been under pressure to step up efforts to help stabilize the country’s housing market.

Depending on the breadth of Mr. Jackson’s plan, a HUD proposal could steal momentum from Democrats’ legislative efforts. But Democrats aren’t likely to endorse whatever the Bush administration approves.

Relations between Democrats and Mr. Jackson have become fractious in recent months, as lawmakers have openly criticized his leadership. Connecticut Sen. Christopher Dodd last week called on Mr. Jackson to resign.

The White House has said it supports Mr. Jackson.

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