A study circulated within the American Securitization Forum last month proposed the Federal Housing Administration broaden its FHA Secure loan refinance program to stem more foreclosures. The program should allow borrowers delinquent for any reason to refinance into an FHA loan, versus the narrow requirement that borrowers face a higher interest rate.
The ASF proposal comes amid signs that falling home prices will continue to push foreclosures higher. FHA Secure thus far has refinanced about 1,000 borrowers, making it a "failure" so far, Rod Dubitsky, a managing director at Credit Suisse, said on an ASF panel here.
The ASF plan, reported by Reuters on Jan. 27, "would allow another loss mitigation alternative that's not available to servicers today," said Stephen Kudenholdt, a partner with Thacher Proffitt & Wood and an author of the ASF's federally supported streamlined rate-freeze plan.
The ASF plan would be the only vehicle that would allow a "short refinancing," in which a borrower refinances a loan whose balance is more than the underlying property's value, Kudenholdt said. The new loan would cover the lower home value, giving investors in the first loan a principal loss.
Whether accepting a loss of principal or a lower interest rate, investors generally agree that modifying loans is a better alternative than foreclosure, especially in a market with falling prices.
Lenders have boosted modifications under their own plans and another written by the ASF, but the success has fallen short of what's needed to reduce foreclosure rates, panelists said.
The current FHA Secure program may be unattractive because lenders may have a hard time selling the loans, Credit Suisse's Dubitsky said. FHA's securitization arm, under pressure from traders, pledged to keep its FHA Secure loans out of its standard Ginnie Mae bonds, which are prized for their liquidity.
Fostering a program to allow for short refinancings is important since homeowners without equity are at most risk for default, Dubitsky said. Concerns about defaults based on slated interest-rate increases should subside since mortgage rates have dropped in recent months, he said.
With a short refinancing, "the borrower would be able to stay in the house," Kudenholdt said. "It's not a distressed sale" and that protects property values.The current FHA Secure program is poised to help around only 44,000 subprime borrowers, or 5 percent of those who are more than two months behind in their payments, according to the study circulated by the ASF. The new guidelines would reach 607,000 subprime borrowers, or 68 percent of those who are severely delinquent, it said.