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HUD Pushes for Fed to Insure Popular 'Hybrid' Mortgages

The agency says change would aid borrowers with bad credit and boost homeownership.

March 12, 2003|From Bloomberg News

The Department of Housing and Urban Development said Tuesday that it wants to expand the types of mortgages made to borrowers with bad credit histories that the federal government will insure in an effort to expand homeownership.

The agency's proposal to have the Federal Housing Authority insure so-called hybrid mortgages, or adjustable- rate loans that have an initial fixed-rate period of three to 10 years, would result in 40,000 new loans a year, HUD Secretary Mel Martinez estimated.

FHA loans are backed by the government and allow people to buy homes who have blemished credit or not enough money for the minimum 5% down payment required by most private lenders. Under existing guidelines, the FHA can insure only fixed-rate or one-year adjustable loans, said Lemar Wooley, a HUD spokesman.

Hybrid loans have grown in popularity with borrowers who don't intend to stay in their homes for more than a few years, said Phil Colling, an economist with the Mortgage Bankers Assn. of America. The rate for the fixed period of a hybrid loan typically is lower than that for a 30-year fixed mortgage, Colling said.

"Even with the low 30-year fixed rates, some people know they are only going to be in their house for a few years so they go for the lower hybrid rate," he said.

The federal agency said it will insure only hybrid loans that have a 1% annual adjustment cap after the initial three- or five-year fixed period, with a maximum change of 5% for the life of the loan. For hybrids with a seven- or 10-year fixed period, annual adjustments will be capped at 2%, with a maximum change of 6%.

The proposed rule change will be followed by a 60-day public comment period, after which HUD will make its final decision, Wooley said.

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