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For some, a chance to refinance despite default

September 01, 2007|Kathy M. Kristof | Times Staff Writer

The Federal Housing Administration is coming to the rescue of at least some of the homeowners in peril across the country. The FHA, which has long helped low-income and credit-scarred borrowers get financing, has launched FHA Secure in an effort to stem the tide of foreclosures caused by the sub-prime mortgage crisis.

How will FHA Secure work and who might it help? Here are some answers.

What is FHA Secure?

It's a new loan program aimed at helping borrowers refinance their adjustable-rate mortgages -- even if they are currently in default. The Bush administration believes that some sub-prime borrowers didn't understand the terms of their loans and have fallen or will fall into repayment trouble when their adjustable interest rates reset at higher levels.

FHA Secure loans will be made by private lenders at market interest rates and simply be insured by the FHA. What will be different is that underwriting standards will be loosened, allowing more borrowers to qualify. The FHA insurance premiums -- usually the same for all loans -- will be based on risk, declining for those with more equity and better credit.

Who qualifies for these loans?

FHA officials say about 80,0000 more Americans will be able to refinance with FHA Secure, on top of the estimated 160,000 already expected to use FHA in the next year or so.

Critics of the program point out that this is only a fraction of homeowners in trouble. A host of groups, including the Assn. of Community Organizations for Reform Now and AARP, are calling on the administration to do more.

To qualify:

- Even if you're in default today, you must have had a history of on-time payments until your so-called teaser rate expired and the interest on your adjustable-rate mortgage reset.

- The interest rate must have been scheduled to reset between June 2005 and December 2009.

- You must have 3% cash or equity in your home.

- You have to show a history of sustained employment.

- You have to prove you will have sufficient income to make the FHA Secure loan payment.

What's the maximum loan amount under the program?

FHA limits vary by county. In most major California cities, the maximum FHA loan for a single-family home is $362,790.

What if my mortgage is more than that?

An FHA proposal would hike the loan limit to $417,000. The proposal had been stalled in Congress but appears to be gaining steam and may be at the top of the priority list when lawmakers return from recess.

What about the interest rate?

An FHA loan is only modestly more costly than an ordinary loan, said Jeff Lazerson, a Laguna Niguel mortgage broker. Current rates for a traditional, so-called conforming loan averaged 6.09% on Friday, according to

If you have a small down payment, lenders charge more -- closer to 6.5%.

The FHA also charges a 1.5% upfront insurance premium, plus 0.5% a year, which could bring the total annual loan rate to 7% or higher. On a $350,000 loan, that would mean a $2,329 monthly payment.

That's not cheap, to be sure, but many sub-prime borrowers are paying 10% or more, Lazerson said. At 10%, the monthly payment on a $350,000 mortgage would be $3,071.

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