Will the new FHASecure Initiative save all the borrowers with subprime mortgages facing foreclosure? The crystal ball is a little murky on this issue. First, many of the subprime mortgages at issue have loan amounts far above the FHA mortgage limits. Legislation is under consideration that would raise those limits, but nothing is in place yet to do so. Second, many of the high loan to value subprime adjustable rate mortgages issued over the last few years were those referred to as “80/20’s”. This means a combination of a first mortgage for 80 percent of the sales price or home value and a second mortgage for the remaining 20 percent. The second mortgage was most often a fixed rate mortgage with a balloon payment at 15 or 20 years.
The HUD Mortgagee Letter announcing the FHASecure program states:
“If the new maximum FHA loan is not enough to pay off the existing first lien, closing costs and arrearages, the lender may execute a second lien at closing to pay the difference. The combined amount of the FHASecure first mortgage and any subordinate lien may exceed the applicable FHA loan to value ratio and geographical maximum mortgage amount.”
As is usual with HUD this is left open to interpretation. Of course for quite some time it has been allowable under the standard FHA guidelines to have a second mortgage resubordinated (i.e. kept in place still secondary to the new first mortgage) even if the second mortgage is above 100% of the value of the home. This has been useful when the borrower has two mortgages, however there has been a foolhardy lack of cooperation by the second mortgage holders. They often refuse to resubordinate, with the result being a default on both mortgages. The second mortgage holder definitely ends up on the short end of the stick then.
With FHASecure, my bet is that bigger lenders who also do FHA lending will refinance their own subprime loans and hold back second mortgages for the balance due – if only to avoid a default on their own books. However, there are a lot of subprime mortgage note holders who do not offer FHA loans, or are even out of business. It will be really interesting to see how these lenders interact with other lenders and brokers trying to refinance these loans.
Another major influencing factor is that many of the homeowners who might use FHASecure have other credit problems which disqualify them from the program. In order to qualify for FHASecure, a borrower must have perfect credit for the six months prior to refinancing. There are many borrowers who don’t fit this profile.
It remains to be seen how useful the FHASecure program will be. It will definitely save some borrowers, but it may not be enough to save those most in need of help.