Need a new mortgage? Call Uncle Sam

The Bush administration says it has the answer to the housing crisis: a program offering cheaper loans. It has helped many people, but critics say it's not enough.

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By Les Christie, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- On Capitol Hill this week, lawmakers are set to continue to grapple with the best response to the rising tide of home foreclosures. But the Bush administration says it has a solution in place: A nine-month old mortgage refinancing program run by the Federal Housing Administration.

The program, called FHASecure, was launched in August. It has enabled subprime borrowers to switch to low, fixed-rate mortgages after they fell behind on payments because their adjustable rate mortgages reset to higher, unaffordable levels.

FHASecure was envisioned as a foreclosure prevention tool to help an estimated 80,000 homeowners in default and on the verge of losing their homes. The program offered refinanced loans to families with strong credit histories who were paying off their mortgages before their loans reset.

The Senate Banking Committee is set on Tuesday to consider a comprehensive bill to have the government insure up to $300 billion in loans. Last week, when key committee members were trying to work out their partisan differences, the FHA announced that it had helped 200,000 mortgage holders remain in their homes through FHASecure.

"Over the past several months, FHA has been working to help families who want permanent relief from their high-cost subprime mortgages," said Roy Bernardi, deputy secretary of the U.S. Department of Housing and Urban Development, which administers FHA, in the release. "We are proud to have helped these struggling homeowners keep their homes."

But only a small number of the people so far helped by FHASecure - about 3,000, according to FHA - were those in imminent danger of losing their homes. Instead, they were borrowers who were current on their payments who wanted to refinance out of high-cost loans.

"[The original targets] make up only a small portion of the [200,000] people who got FHASecure loans," said HUD spokesman Steve O'Halloran. Instead, he said, "FHASecure became our de facto refinance product."

Indeed, mortgage brokers say that FHASecure has become a viable alternative - in some cases, the only option - for homeowners who, while not necessarily having trouble making their payments, can save several hundred dollars a month by refinancing.

'Concerned about higher rates'

"People are refinancing today because they're concerned about the higher rates," said Steve Habetz, a mortgage broker in Connecticut. "Most people in subprime loans don't want to hit resets."

Subprime ARMs are at the center of the foreclosure crisis. They account for only 7% of U.S. mortgages, according to the latest data from the Mortgage Bankers Association, but represent 42% of all delinquencies. The loans come with low fixed interest rates for the first two or three years, after which they reset higher and can readjust every 6 months.

During the past 12 months, foreclosure filings have more than doubled to 650,000 through the end of March. More than 210,000 Americans have lost their homes this year alone, according to RealtyTrac, an online marketer of foreclosed properties.

In April, the agency said it was expanding FHASecure to try to help more people at risk of foreclosure.

FHASecure, under new rules that begin in July, will be open to all subprime ARM borrowers (not just ones whose loans had already reset) no more than 60 days late or 30 days late twice in a 12-month period. Other criteria: they need to have home equity, or cash, equaling 3% of the mortgage principal.

In addition, borrowers three months delinquent or late three times in a 12-month period will qualify if they have 10% home equity. Their lenders can help them qualify by voluntarily writing down loan balances.

New target: 500,000 new mortgages

With the changes, the agency says it hopes FHASecure will eventually reach a total of 500,000 borrowers. But if the most imperiled borrowers were not being helped in any great numbers, who was?

According to O'Halloran, the 200,000 borrowers helped so far include many traditional FHA borrowers, such as low-income and minority families, who had migrated to the more easily obtained subprime loan products the past few years.

"They started coming in for the loans even before they got into the resets," said O'Halloran. "And others just heard that there was an affordable alternative to subprime."

The FHASecure loans did in fact save homeowners cash - an average of $400 a month, according to O'Halloran.

Lenders were pleased to have the product to sell because the loans came with a guarantee and were easily sold to investors in secondary markets. Mortgage brokers, such as Habetz, promoted them to borrowers as a great refi alternative.

Some of the borrowers who wound up in FHASecure likely could not have refinanced without it, according to Keith Gumbinger, vice president of HSH Associates, which tracks the home lending market.

"Some of these people probably got into their homes originally with very little money down," said Gumbinger.

Home price declines have stripped many properties of any equity they may have once had. Many lenders now require much more home equity than does FHASecure, which may not require any at all.

And even though the overwhelming majority of FHASecure borrowers were not delinquent when they refinanced their loans, it's likely that some of them would have gotten into trouble eventually had they not been able to get out of their ARMs and into low, fixed-rate loans, according to O'Halloran.

Still, critics of the administration who want to see more action taken swiftly say FHASecure has not done enough to prevent foreclosures.

"Even giving FHA the benefit of the doubt, it's nothing to get excited about - not with a million people likely to lose their homes this year," said John Taylor, CEO of the National Community Reinvestment Coalition, a community advocacy group.

But others take the view that many of those taking part in FHASecure would need help eventually, even if they were managing to keep up payments for the moment.

Said Gumbinger: "The good news is that we have helped 200,000 borrowers who would have faced troubling mortgage situations even though only 3,000 of them were in the most dire category."

Are you buried under a pile of debt and need help getting out? Did you recently manage to pull yourself out of debt and want to share your story? Tell us about your experience with debt and how the current credit crisis is affecting you. Send us your photos and videos, or email us to share your story. To top of page

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