Bush’s FHA Plan May Only Reach 10 Percent of At-Risk Subprime Borrowers

A press release showed up on HUD’s Web site tonight with some interesting details about today’s announcement by President Bush of an assistance plan for some troubled borrowers.

Among them is a disclosure that the FHASecure lending program designed to help troubled subprime borrowers will utilize a risk-based pricing system that will allow the FHA to price insurance premiums by a borrower’s risk profile. The system is targeted for implementation by January 1.

Also in the press release is an important number — 240,000. That is the estimate of the total number of at-risk borrowers that the FHASecure program will keep out of foreclosure, with expected Congressional reforms to FHA program guidelines making help available to more.

Keep in mind that most estimates now assume that the total at-risk subprime population numbers around 2.4 million, so today’s announcement would appear to mean that help is available for roughly 10 percent of the troubled subprime population. That assumes all FHA borrowers are subprime, of course, which need not be the case. And, of course, I’m not accounting for run-off (those who have already defaulted) or for a likely understatement of the at-risk population.

Nonetheless, hitting 10 percent of the at-risk borrower population would be an improvement — but it’s also why my earlier post took pains to note that today’s announcement shouldn’t be thought of as a panacea for the overall mortgage and housing crisis.

From Bloomberg, it looks as if the MBA agrees with me:

The FHA expansion, while limited, “is really the only game in town, and there are going to be a lot of people trying to cram through that door,” said Kurt Pfotenhauer, senior vice president for government affairs at the Mortgage Bankers Association in Washington. Bush “today just widened that doorway.”

I’ve received alot of questions regarding FHA loan value limitations from readers; these will vary by state and county. To look up a particular loan limit, click here.

While limits vary, they are well below Fannie and Freddie’s current conforming limit — Orange County, Calif., for example, has an FHA limit of $362,790 — which is why I said earlier today that reforming FHA lending won’t likely matter much to borrowers in high-cost places like California, New York, or Florida.

Assuming borrowers can meet the loan limit hurdle, there are then five criteria for FHASecure eligibility, as outlined in the press statement:

1. A history of on-time mortgage payments before the borrower’s teaser rates expired and loans reset;
2. Interest rates must have or will reset between June 2005 and December 2009;
3. Three percent cash or equity in the home;
4. A sustained history of employment; and
5. Sufficient income to make the mortgage payment.

The requirements seem to be stringent enough so as to allow only decent borrowers through the pike — no delinquencies prior to hitting reset, they’re going to have to be able to qualify on a full doc basis (employment, income), and must have at least some equity in the home based on a current appraisal. If there are 240,000 borrowers like this out there in exploding ARMs right now, this program should be a welcome relief.

It probably goes without saying at this point, however, that these sort of borrowers are likely in the minority relative to most of their neighbors.