Residential Real Estate Newsroom

Bush Administration implements a targeted, financially responsible plan to help homeowners

Risk Exposure

RESPONSIBLE: The Bush Administration's plan will give the Federal Housing Administration (FHA) greater flexibility to insure mortgages and reduce monthly payments for borrowers with adjustable rate mortgages - without forcing taxpayers to foot the bill.  Expanding FHASecure, the government-backed mortgage refinancing product, creates a more viable option for American families who are in the right house but the wrong mortgage, and will help break the cycle of price depreciation and foreclosure.

RECKLESS AND COSTLY: The House plan is financially risky, rewards irresponsible behavior, and mandates a loosening of FHA's underwriting standards, which would put taxpayers on the hook.  The FHA Housing Stabilization and Homeownership Retention Act, H.R. 5830, would permit FHA to provide up to $300 billion in new federal guarantees for risky mortgages.  According to the Congressional Budget Office, "the new loan guarantee program would cost $1.7 billion."  Taxpayers - those homeowners not participating or receiving any help - would be forced to pay if the House expands FHA to cover extremely risky mortgages.  Currently, borrowers pay premiums for the help they get through FHA insurance, allowing FHA to operate without taxpayer subsidies.

RESPONSIBLE: The Administration's FHASecure expansion continues the agency's responsible underwriting standards, including documentation of income and ability to repay the loan.  Borrowers must have sufficient income to make payments on their new FHA-backed mortgages.  They must also show a reasonable credit history; show employment history; and fully document and verify their income.  The new flexibility will only permit borrowers who have no more than three delinquencies on their home loans over the previous twelve months.  To further protect taxpayers and control risk, FHASecure would not allow borrowers' total monthly debt to exceed 43 percent of their monthly net income and, in certain cases, would only insure 90 percent of the value of the mortgage.

RECKLESS: The House plan completely disregards borrowers' payment histories and credit scores.  Borrowers could have missed the majority of their monthly payments over the life of the loan, yet these borrowers would still be eligible for a government-backed mortgage - and taxpayers would be on the hook.  A borrower's debt-to-income ratio would be allowed to go as high as 55 percent, leaving very little income to meet daily living expenses and cover unforeseen emergency costs.

Incentive Structure

RESPONSIBLE: The Bush Administration's plan offers strong, market-based incentives for lenders to reduce ("write down") the principal value of delinquent mortgages.  FHA will permit lenders to make arrangements to "fill-in-the-gap" between existing loan balances and the FHA-insured loan amount, such as issuing subordinate liens.

RECKLESS: The House proposal, H.R. 5830, offers little incentive for lenders to write-down mortgages.  It mandates principal reductions and does not permit new subordinate liens to be used to pay off some portion of the existing mortgage debt, even if that debt were secured by the value of the property.  Existing subordinate lien holders, in particular, are highly unlikely to agree to release liens at a complete loss.

Who Will Be Helped

RESPONSIBLE: Since September 2007, FHASecure has helped more than 180,000 homeowners refinance their loans and avoid foreclosure.  With this expansion, FHASecure is expected to assist about 500,000 families by the end of the year.  Homeowners using FHASecure are, on average, saving $400 a month compared to their previous loans.

FHASecure has also had a significant and positive impact on the housing market.  Since September 2007, FHA has helped pump nearly $68 billion of much-needed mortgage activity into the housing market, $28.5 billion of which was through FHASecure refinancings.

RECKLESS: For two years, Congress has ignored President Bush's call to modernize FHA and allow it to offer safe, affordable mortgage products to more first-time homeowners and families trying to stay in their homes.  Congress still has not sent a final bill to the President's desk.  The House Financial Service Committee estimates 1 million to 2 million credit-risky borrowers would be eligible for its plan, but the Congressional Budget Office estimates only 500,000 families will be helped - and at a huge cost to taxpayers.