Housing rescue: Fighting over best fix

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NEW YORK (CNNMoney.com) -- While Congress grapples with how to help troubled homeowners, the Bush administration is expanding a more modest effort to help at-risk borrowers.

The Federal Housing Administration announced changes last week to FHASecure, a program launched in August in response to a housing crisis that threatened as many as 2.2 million borrowers of adjustable rate mortgages (ARMs) with foreclosure.

The changes - the agency's second attempt since April to broaden the scope of FHASecure - underline a debate that is front and center in Washington: What's the best way to rescue borrowers at risk of losing their homes as the nation faces one of the worst housing crises in decades?

The House - led by Democrats and Republicans in states hit hard by foreclosures - passed a contentious foreclosure-prevention package last Thursday that would back as much as $300 billion in mortgages. A key Senate panel could consider the bill as soon as this week, but it faces resistance from Republican lawmakers and a veto threat by President Bush.

At the same time, the FHA on Thursday loosened its rules setting out the criteria that borrowers must meet to obtain an FHA-insured mortgage.

The FHA has been dogged by criticism that it is not acting aggressively enough to tackle the problem and throw a lifeline to as many people as possible.

In August, FHA originally said it hoped that FHASecure would refinance 80,000 ARMs for delinquent borrowers who would otherwise likely lose their homes.

But the FHA's own data shows that the program has so far helped fewer than 2,000 of those homeowners.

"The current FHASecure numbers are woefully inadequate," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, a community advocacy group. "It's not having an impact on the crisis."

The FHA, while acknowledging that it has helped fewer borrowers than it originally intended, says nearly 200,000 have gotten refinanced mortgages under FHASecure.

"The vast majority of the 189,000 people we helped through FHASecure were not delinquent on their loans," said Bill Glavin, a special assistant to the FHA commissioner. "But we truly believe that a great majority of those people we helped were headed for default eventually."

Even so, the FHA has responded by expanding the program. Until recently, FHASecure was available only to borrowers who fell into delinquency after low, teaser interest rates on their ARMs reset to much higher rates.

In April, the agency announced that it would no longer restrict the program to those borrowers. Instead, all subprime ARM borrowers who were no more than 60 days late - or 30 days late twice in a 12-month period - would be eligible for an FHA-insured loan, as long as the borrower had home equity, or cash, equaling 3% of the mortgage principal.

Also as part of this expansion, borrowers who were three months delinquent or late three times in a 12-month period qualified for FHASecure, but these borrowers needed to have 10% home equity or the cash equivalent. To enable borrowers to reach those loan-to-value ratios, lenders could voluntarily write down balances.

"The changes we have made with FHASecure will help us reach about 500,000 homeowners in total by the end of this year," said Roy Bernardi, the deputy secretary of the Department of Housing and Urban Development, which runs FHA, told the Federal Home Loan Banks Annual Directors Conference on April 29.

In the latest change, the FHA announced on Thursday that it would cover more people by pricing in the risk of default when screening potential borrowers.

Since its birth during the Great Depression, the FHA has charged all borrowers the same rate. Starting in July, the agency would initiate higher insurance premiums for borrowers with riskier credit profiles.

Here's how it will work: The FHA currently charges 1.5% of a mortgage's principal up front and .5% a year until borrowers pay off 22% of the loan's balance. For a $150,000 loan, the premium comes to $2,250 upfront and about $750 a year. Under risk-based pricing, the up-front cost could rise to 2.25% ($3,375) and the annual premium .55% ($825).

FHA-insured loans, even with insurance premiums, tend to be more reasonably priced than what borrowers would pay otherwise.

"On average, when [ARM borrowers] refinance into a new FHA loan, they're back to paying about the same as when they were paying at the teaser rate on the loan," Glavin said.

The introduction of risk-based pricing will change the math a little. "Some people will pay a little more in insurance premium," said Glavin. "But we felt we had to balance out the added risk."

After the added premiums are folded into the mortgage payment, the difference comes to only about $12 a month for that $150,000 loan.

The timing of the announcement coincided with the House passage of a bill sponsored by Barney Frank, one that takes a much more comprehensive approach to meeting the foreclosure crisis. Critics of the bill, including Bernardi of HUD, charge that it could cost taxpayers billions while the FHASecure program is relatively risk-free.

"This is the time for vision and prudence. We must give the American people real solutions to the housing crisis, not multiply problems," Bernardi said late last month. "The Bush administration favors responsible, specific efforts to save homeowners and allows FHA to be a central part of any lasting solutions," he said.

According to Frank's office, a stronger response to the foreclosure crisis is needed.

"We already acknowledged that there will be increased risk," said Steve Adamske, a Frank spokesman. "But the housing crisis is affecting the entire economy and will prolong any recession. FHASecure has not helped as many people as it needs to."

But will the expansion of FHASecure improve that record?

"It might save a few more borrowers," said Carr. "But in the context of reports of foreclosure filings up 112% this year, representing 600,000 homeowners, it's not nearly as robust as it has to be."