Why the President"s proposed FHA housing bailout won"t work.
On August 31, 2007, President Bush announced steps that the Federal government will take to help homeowners in need of assistance to avoid foreclosure. The administration launched a new FHA initiative called "FHA-Secure". This program is supposed to help homeowners to refinance current mortgages that have recent late payments as a result of an adjusting of their interest rate.
This program will not work because the problem with the nation's real estate is deeper than just Adjustable rate mortgages. The broader problem with refinancing these mortgages is income documentation. Many people who took on an adjustable rate mortgage not only had bad credit but also were not able to prove their income when they originally took out the financing. During the past 2-5 years, the majority of sub prime and Alt-A loans were given with Stated income or No income documentation. The recent mortgage meltdown has all but eliminated such programs. These programs were a bad idea from the beginning.
FHA mortgages have always and will continue to require full income documentation disclosure. In addition to disclosing your income (by providing pay stubs and W-2's) to apply for an FHA mortgage, you must also qualify with a very stringent 31% housing to income ratio. That means that your monthly mortgage payment, taxes and insurance can equal no more than 31% of your income. Since most of the loans in need of refinancing were created with Stated income liar loans, homeowners may not be able to qualify under this ratio.
Another stumbling block to refinancing with the FHA is that they have low loan limits (determined on a county by county basis). Currently, the maximum FHA loan limits vary between $200,160 and $362,790 for a single family home. Many areas have "outgrown" these loan limits because of drastically increased home values in the past 5 years. For instance, a single family home in New York City will range in price from $350,000 to $700,000. Only a small number of homeowners in large metropolitan areas can receive financing insured by the FHA.
Finally, many people purchased their homes in the past 5 years with 100% financing. Since prices have been dropping during the past 12 months, many homeowners are "upside down". This occurs when you owe more on your mortgage than your home is actually worth. FHA financing only allows up to a 95% loan to value. For example, if your home is worth $200,000 and you currently owe $210,000, your loan to value is 105%. You would not qualify for an FHA refinance.
While the President's idea has good intentions, it will not help the majority of the people who are in mortgage trouble. The bottom line is that many people couldn't afford their housing at their initial teaser rate, definitely can't afford them at the higher adjusted rate and won't qualify for a new FHA loan due to the required housing ratios, loan limits or loan to value requirements. Only people whose housing payment is under 31% of their income, need a loan of less than the maximum loan limit for their county and who have at least 5% equity in their home will be able to refinance under the FHA program.
This program will not work because the problem with the nation's real estate is deeper than just Adjustable rate mortgages. The broader problem with refinancing these mortgages is income documentation. Many people who took on an adjustable rate mortgage not only had bad credit but also were not able to prove their income when they originally took out the financing. During the past 2-5 years, the majority of sub prime and Alt-A loans were given with Stated income or No income documentation. The recent mortgage meltdown has all but eliminated such programs. These programs were a bad idea from the beginning.
FHA mortgages have always and will continue to require full income documentation disclosure. In addition to disclosing your income (by providing pay stubs and W-2's) to apply for an FHA mortgage, you must also qualify with a very stringent 31% housing to income ratio. That means that your monthly mortgage payment, taxes and insurance can equal no more than 31% of your income. Since most of the loans in need of refinancing were created with Stated income liar loans, homeowners may not be able to qualify under this ratio.
Another stumbling block to refinancing with the FHA is that they have low loan limits (determined on a county by county basis). Currently, the maximum FHA loan limits vary between $200,160 and $362,790 for a single family home. Many areas have "outgrown" these loan limits because of drastically increased home values in the past 5 years. For instance, a single family home in New York City will range in price from $350,000 to $700,000. Only a small number of homeowners in large metropolitan areas can receive financing insured by the FHA.
Finally, many people purchased their homes in the past 5 years with 100% financing. Since prices have been dropping during the past 12 months, many homeowners are "upside down". This occurs when you owe more on your mortgage than your home is actually worth. FHA financing only allows up to a 95% loan to value. For example, if your home is worth $200,000 and you currently owe $210,000, your loan to value is 105%. You would not qualify for an FHA refinance.
While the President's idea has good intentions, it will not help the majority of the people who are in mortgage trouble. The bottom line is that many people couldn't afford their housing at their initial teaser rate, definitely can't afford them at the higher adjusted rate and won't qualify for a new FHA loan due to the required housing ratios, loan limits or loan to value requirements. Only people whose housing payment is under 31% of their income, need a loan of less than the maximum loan limit for their county and who have at least 5% equity in their home will be able to refinance under the FHA program.