In a recent article, Carol Marshall reviews the latest FHA home loan programs created to help homeowners stay in their houses with prevention measures against home loan defaults.  HUD secretary Steve Preston has been on the job as the Secretary for HUD for a month. Preston made his announcement in Detroit, which he called “the epicenter of the foreclosure crisis,” for his 1st significant address as HUD secretary to announce an aggressive foreclosure prevention assistance program.  Under the program, HUD would enter a joint venture partnership to buy bad loans from lenders, Preston said at a July 9 Detroit Economic Club meeting. The new FHA loan program will begin in Detroit, one of the country’s hardest-hit foreclosure markets. “Traditionally, when all FHA loan modification and loss mitigation measures have been exhausted, mortgage lenders foreclose and then submit a claim to FHA,” Preston said. “Under this program, we will create a means for lenders to sell their non-performing mortgages before foreclosure to HUD and a joint venture partner.”   FHA is trying to prevent foreclosure losses and may assist the troubled housing market stabilize, he said, at a time when the market remains on the brink of future disaster.

Experts estimate as many as 2.5 million foreclosure filings this year, Preston said, compared to 1.5 million in 2007. The average is 650,000. Housing prices are down between 4 % and 17 % nationwide. At the same time, FHA lenders have pulled back from originating loans, which are at their lowest levels since 2000-2001.  In Oakland, Wayne, Macomb, Livingston and Washtenaw counties, there are some 40,000 houses on the market now, representing a 17-month supply, well above the national average of 9.6 months. A six-month supply is considered normal, Preston said.  ‘This is tough on families, very tough,” Preston said.  In some parts of the country, the market was impacted by the housing bubble. But in Michigan, fundamental economic challenges prevail.

“Sub-prime lending is not in and of itself a bad thing,” Preston said. “It has been the path to home ownership for very responsible people. But irresponsible behavior has led to a dangerous proliferation in the market.”  There is $1.3 trillion in outstanding subprime loans – about 12% of the market, but more than half of the foreclosures.  Non-prime avariable rate mortgage loans represent 6% of outstanding home loans, but more than 40% of foreclosures, with more than 1 in 4 of those home loans currently more than ninety days past due or in foreclosure.

Unfortunately, the worst may be yet to come.  “We have another $150 billion in subprime ARMs resetting in the next 18 months,” Preston said. “We’re right in the middle of that reset period of time. We have to understand that we will continue to be flooded with a need to work out these loans.”  That’s where the government has been at the center of the solution, Preston said. Government supported lending is essentially the only source for non-jumbo loans.  FHA home loans, Fannie Mae, Freddie Mac and the Federal Home Loan Bank have absorbed the retreat of the private sector, he said.  But HUD needs to protect itself as well, Preston said. So the department is pushing to institute risk-based pricing on FHA mortgage insurance. “FHA will price the insurance premiums for borrowers according to their credit risk,” he said. “Today the typical borrower pays 1.5 points …. Riskier borrowers will pay 2.25.”  He disputed critics’ claims that risk-based pricing hurts low-income borrowers.  “The facts show the opposite. Risk-based premium pricing will actually benefit lower-income borrowers. Contrary to conventional wisdom, FHA families with lower incomes actually have higher FICO (credit) scores. They are hard-working people who live within their means and pay their bills,” he said.

FHA has taken some measures already to try to stem the tide of the foreclosure crisis – temporarily eliminating the 90-day requirement for buyers to hold a property before selling; increasing FHA home loan limits to as high as $729,000 in some areas of the country.  The recent alliance with HOPE NOW, an organization that offers aid and advice to distressed homeowners has proven to be a wise move.  Hope connects these borrowers with mortgage lenders in an effort to revise their existing mortgages to allow homeowners to remain in their properties at an interest rate they can afford while establishing effective housing counseling programs.

In a recent article published by the Star Tribune, H.J. Cummins raises some interesting home loan points.  Cummins assets that income alone “does not explain why minority borrowers got a disproportionate number of sub-prime home loans in the run-up to the current foreclosure crisis.”.  That study also ranked cities by the home loan disparities between white borrowers and those from racial and ethnic minorities. Only Milwaukee gave a worse sindication than the Minneapolis metro area, based on data concluded in 2006.  The 2007 and 2008 data in not available yet.  This data was gathered and collected under the federal Home Mortgage Disclosure Act (HMDA).

John Taylor who is the head of the National Community Reinvestment Coalition said “The financing data reminds us that the current housing crisis was overwhelmingly the result of the explosion of bad loan products in financially vulnerable communities.” However it should be noted that the the study did not consider credit scores or loan payment delinquencies.  FHA home loans are the most popular financing tool used today for buying or refinancing a home and they do not use credit scores into the underwriting score card.  

In the Minneapolis area, middle- and upper-income blacks were three times more likely than comparably paid whites to get loans that carry more expensive terms designed for high-risk borrowers called sub-prime or “Alt-A” home mortgage loans. Middle and upper-income Hispanics were 2.4 times more likely; Asians, 1.6 times.

Dave Snyder, a community organizer at Jewish Community Action in St. Paul was not surprised by the financing data revealead. “It’s not a statistic that stands in isolation,” Snyder said. He continued by noting that Minnesota has one our country’s lowest homeownership rates for black people, and one of the highest for white people.