Briefing by Assistant Secretary Montgomery
on FHA's Plan to Help Homeowners
Briefing by Brian Montgomery,
HUD Assistant Secretary for Housing and
FHA Commissioner on Bush Administration�s plan to help
nearly one-quarter of a million homeowners to avoid foreclosure
Friday, August 31, 2007
For those of you who are not familiar with FHA, the Federal Housing Administration, we would like to let you know that first and foremost that we are not a bank; that we are a government agency that provides mortgage insurance to borrowers through our network of FHA approved lenders.
As you know, we have a long history of service to the nation. We were created during the Great Depression to stabilize the economy. In fact, since 1934, we have helped close to 35 million people buy a home. By the way, the vast majority of those have been first-time home buyers.
In all cases, the borrower pays for the mortgage insurance, so this is not a government hand-out. We also help some borrowers that are looking to refinance their existing loan. Now, most of these refinance loans are to people who are not current FHA customers. In fact, close to 90 to 95 percent of them are not.
Please note that all potential borrowers must meet our underwriting criteria, including that we verify the borrower's ability to repay the loan, unlike a lot of what you've been seeing in months past with the sub-prime lenders. And in all cases, the borrowers must occupy the home. So these loans are not for vacation homes or investor properties.
Today, as you have heard, the President has indicated his support for a modified version of the existing FHA refinance product. The President wants FHA to help break the cycle of foreclosure and price depreciation, and bring much-needed liquidity to a mortgage market that has quickly become constricted.
Let me explain his position. The President realizes that many sub-prime borrowers are now in mortgages that are resetting at much higher interest rates. Some are doubling. Some are even tripling from the teaser rate that lured these borrowers in. And many sub-prime borrowers are looking for an exit strategy. And we recognize this fact. And we have acted to help as many people as we could under current legal constraints.
We have already proactively helped many borrowers this year. In fact, we
estimate by the end of this fiscal year, we will have helped more than 100,000 borrowers refinance and do an FHA loan, which is, by the way, a 66 percent increase from last year.
But in order to assist more Americans, we want to go further and are going further. At the moment, only borrowers who are current on their existing loan are allowed to refinance in FHA.
This initiative will allow those who have missed payments to get an FHA-insured loan. In light of the turmoil caused by the sub-prime market, not just in the U.S., but in markets worldwide, we are proposing this new FHA refinance product. And we are calling this new product FHASecure.
Under FHASecure, borrowers who are otherwise creditworthy but have recently become delinquent on their mortgage would now also be able to participate in all the benefits FHA offers. So families with an otherwise strong credit history but find themselves in default because of the reset in their mortgage rate can now receive some help.
Now, bear in mind that we are helping people using FHA's strict underwriting standards. We're using commonsense measures to ensure people that are taking our insurance can repay the loan.
And we are setting reasonable standards. Eligible homeowners will be required to meet our underwriting guidelines and pay, of course, the mortgage insurance premium. And this, in turn, offsets the risk to the FHA insurance fund at no cost to the taxpayer.
Specifically, the borrower must have a good payment history for the six-month period prior to the reset. In other words, their delinquency must be attributable to the interest rate reset. In all cases, participants must also have sufficient equity to qualify. That standard today is three percent, and that will be same under FHASecure.
And they can also refinance any outstanding late payments into the new loan.
We will also require new property appraisal to verify the value of the home.
Well, the President's action is a positive step that is being immediately implemented. Through FHASecure, we estimate we can help an additional 60,000 delinquent yet creditworthy borrowers refinance and do a safer FHA loan. By the way, this is in addition to the 160,000 non-delinquent borrowers we already expect to help in FY '08, as the sub-prime market continues to unwind.
This will bring the total of new borrowers assisted through FHA's existing refinance program and FHASecure to 220,000 next year. This proposal will take effect almost immediately through administrative action, and it is a lifesaver for each of those who qualify.
Now let me turn to a second concept, risk-based pricing. As many of you know, for years, FHA has considered implementing an improved pricing structure. We have considered changes that would allow our mortgage insurance premiums to be based on the level of risk posed by the borrower.
Today at this moment, we charge all borrowers the same premiums. Again, this is something that just makes common sense: Charge riskier borrowers more, and safer borrowers in turn will pay less. We plan to implement this change starting in January, after we have had a public comment period. Lenders could also use this period to update their IT systems and to make other preparations.
We strongly believe that risk-based pricing is good business, and want to improve the overall management and financial soundness of the FHA Insurance Fund. It makes sense, and this is how all major insurance companies price risk. Such a change would make a big difference. FHA projects that an additional 20,000 borrowers will refinance from conventional to FHA insured mortgages as a result of risk-based pricing and the expected and continued loss in sub-prime options over the next year.
In addition, we'll likely serve 120,000 additional new home buyers, not just the refinancers, but new home buyers, through risk-based pricing who have fewer options as the result of the contraction of sub-prime products.
Finally, let me discuss our ongoing effort to pass FHA reform. Our focus has been on offering families safe alternatives to some of the more exotic and riskier products on the market, which is why we worked with Congress last year to introduce legislation that would modernize the FHA.
Well, that bill is still not law. Although we got close with it, passing the
House by a wide bipartisan margin in 2006, 415-to-7. We could have helped more families from being steered into exotic high-cost loans. Instead, now we are helping them get out of a troubling situation through the reforms that I mentioned earlier.
But as the President said today, we need Congress to pass this legislation, because it will help us reach even more troubled borrowers. Now is the time. We began an outreach effort to troubled sub-prime borrowers in October of last year, and have been able to help more than 100,000 homeowners keep their homes because of it.
The bottom line is that we envision that this day may and could some day be upon us, which is why we had pushed for FHA reform last year. But the markets didn't perceive the magnitude of the problem, nor how quickly problems would spread, not just in the U.S., but in markets worldwide.
The President's legislation, by the way, does three main things. With FHA reform, we can do even more risk-based pricing, and thus reaching even more borrowers. The legislation would also provide families some flexibility in the downpayment, something that we cannot do today. And just like in the rest of the mortgage industry, families looking to put down less money would pay a slightly higher premium, and this change would also help refinance more borrowers.
And the bill would also raise loan limits. Right now, FHA can't serve high-cost states such as California and New York. Under the legislation, the loan limit in these states would rise from $362,000 to $417,000. And we estimate these legislative changes would enable us to refinance an additional 60,000 conventional and FHA mortgages a year.
And there is security and certainty with these loans. FHA can and does stay in all markets all the time. Now, I mention all this by way of background. Our work at FHA and other initiatives the President announced today we think are a powerful way to help our citizens in their time of need.
Educating families has been a top priority of this Administration, which is why we have increased housing counseling funds by over 200 percent since 2001.
Now, with these actions, consumers and FHA both will have new tools for more secure and safer mortgages. As Americans learn more about the mortgage process and its possible dangers, they will have more safeguards and more powerful options to avoid dangerous exotic sub-prime loans.
The passage of FHA modernization legislation is imperative. And every day of delay places more and more Americans at unnecessary and avoidable risk. This legislation is vital for the economy and for the American people, and hundreds of thousands of Americans would benefit.
And each person who benefits will be able to keep a home and all that it represents -- shelter, equity, a place to live and to house our families, a place to grow up and grow old, a place that gives you a stake in your neighborhood. We believe that these actions make common sense and help protect the dream of home ownership for even more Americans.
Thank you very much. I'll be happy to answer any questions you have.
OPERATOR: Our first question is from Rucker Patrick from Reuters. Go ahead.
MR. PATRICK: Hi, Commissioner. Maybe real quick, we could just go through some of those numbers -- just to make sure I've got that right. You said with the new program, the Safe program and the existing efforts for sub-prime borrowers, you expect it to help 220,000 sub-prime borrowers next year?
MR. MONTGOMERY: Let me peel that back a little for you. With no changes, if we just stayed the same --
MR. PATRICK: Right.
MR. MONTGOMERY: In FY '08, we anticipate that we would assist 160,000 conventional FHA REFIs. By doing the FHASecure program and the risk-based pricing that would add 80,000 to that number, which gets you to 240,000.
MR. PATRICK: Okay. And you said by the end of this year 100,000?
MR. MONTGOMERY: Yes. By the end of this fiscal year, we will do -- it's close to a 101,000 conventional FHA REFIs.
MR. PATRICK: Is that with this new initiative?
MR. MONTGOMERY: No, that's without it.
MR. PATRICK: Without it. Okay. So you couldn't -- I mean, I guess if you could do this right away, that number could be higher?
MR. MONTGOMERY: Yes. Since we're still in FY '07 and we will enact this quickly, then yes, that number could go up some.
MR. PATRICK: But from that 100,000 in 2007?
MR. MONTGOMERY: Correct. Since we're still in 2007.
MR. PATRICK: Right. Can you explain a little bit more about the risk-based pricing -- and I think what you've explained is exactly the opposite of what Barney Frank and the House wants to do. Doesn't he want to charge the riskier borrowers a lower premium and not the less risky borrowers a higher premium to subsidize them? I'm just saying how this is risk-based pricing -- and plan you talked about different from Barney Frank and what's in the House legislation that just passed?
MR. MONTGOMERY: Well, I'm glad you brought that up because risk-based pricing was in the House bill last year, which, by the way, would have gone to three percent on the upfront premium, the one that passed 415 to 7. There is a variation of risk-based pricing in Chairman Frank's bill as well. What we're doing today or what we would do by January, following the comment period and other things, is raise the maximum to our current statutory limit. Our statutory limit today is 2.25 percent on the upfront, although right now, we're only charging 1.5 percent.
On the annual premium, we're today charging 0.50. That would go to 0.55.To put that in the context of what that means on a payment, for a $130,000 home at 6.75 percent interest, by going from 1.5 to 2.25, your premium goes up $13 a month. And going from 0.50 to 0.55, it goes up $6 a month.
So for $19, now a family who prior to this might have been too high of a risk for us can now participate in FHA. And by the way, we use the $130,000 number because that's the average cost of an FHA loan today.
OPERATOR: Our next question is from Uri Berliner from National Public Radio.
MR. BERLINER: The question I had was pretty much answered. It was about the numbers. So you can just move on.
OPERATOR: Our next question is from Dave Michaels from the Dallas Morning News. Go ahead.
MR. MICHAEL: Commissioner, can you explain just what can be done immediately by administrative action, and then what actually requires something to be passed in the Congress?
MR. MONTGOMERY: Thank you, Dave. The FHASecure, which is allowing the delinquent borrowers now to refinance in FHA, can be done administratively. We will enact that later today. Obviously, it being a long weekend, it will probably be Tuesday. And again, that will be done quickly.
The risk-based pricing element requires a public comment period that we will do very soon, and then after that -- and we keep moving forward on it, it'll take about three months for our partners, our FHA partners, to update their systems. So we anticipate a January 1, 2008 effective date for risk-based pricing.
The legislation is anyone's guess. We're hopeful now that Congress will see us moving forward, and hopefully you'll follow that.
MR. MICHAEL: And can I just add a follow up there -- actually a somewhat different question. But the number of FHA endorsements in our state, in Texas, for instance, has fallen a great deal over the last four years. I think it's about 78 percent. These sorts of changes, how do you expect that in the next couple of years, they might affect the popularity of the FHA insured loans?
MR. MONTGOMERY: Well, since you brought up Texas, I can say despite the volume, which has dropped in almost every state, FHA is still home to the four most -- Texas is home to the four counties in the entire country that have the highest FHA volume, which in this order is Terrance, Harris, Dallas, then there is a county in Georgia, and then Bear County is fifth.
But Texas, like a lot of states, you did have a lot of people who turned towards sub-prime products. As many of you know, FHA for years was -- and you can talk to realtors or mortgage bankers and brokers and they'll tell you we're the slowest game in town. We have a lot of antiquated systems, antiquated processes and procedures, many of which that we've changed and improved over the last two years. But still, if you look at how much volume we lost, it almost mirrors the volume that went to the sub-prime market. And we think by now -- by doing more consumer outreach, by working closely with our industry stakeholders and housing advocates, they are now once again and are seeing the many benefits of FHA. And we anticipate, as a result of that, that more higher-risk borrowers with spotty credit will now be looking toward FHA.
OPERATOR: Our next question is with Jim Angle from Fox News. Go ahead.
MR. ANGLE: Hey, Brian. I just want to make sure, and I want to ask you two things. One, on the 160,000 of the 240, are those sub-prime or are those just -- in other words, just if you would characterize the 160 versus the 80 additional. And the second thing is Senator Schumer today said that -- applauded the President finally joining the Democrats and said he hadn't really done anything until now. Would you talk about the FHA bill that was voted on in the House last year? Was that proposed by the Administration, and what has been done up until now?
MR. MONTGOMERY: Jim, yes. Last year, the Administration, in April of '06 -- and Senator Schumer should know this -- introduced an FHA bill, which would had even more than what we're able to do administratively today. So -- you know, this is not new territory for the Administration. I do want to say I will give a bipartisan response, in that many on the other side of the aisle, including Maxine Waters and Barney Frank last year, in addition to many Republicans, saw the benefits of that, and passed the bill. It was the Senate that failed to act at that point.
So I welcome them to join us in our effort that is almost approaching two years now. And secondly, relative to the number of sub-prime, we estimate probably 90, 95 percent, if not more of those, are sub-prime -- of those REFIs.
MR. ANGLE: So in other words, 90 to 95 percent of the 240?
MR. MONTGOMERY: That's correct.
MR. ANGLE: Okay. Thanks, Brian.
OPERATOR: Our next question is from Sarah Lane from CNN. Go ahead.
MS. LANE: Hi. I'm wondering how will you determine eligibility for the FHASecure program? In other words, how far behind in payments can a homeowner be? What sort of credit score will they need to have to qualify?
MR. MONTGOMERY: Well, as far as how many arrearages they have, how many months, that will depend, because we still have the three percent minimum equity requirement. So that will sort of be the benchmark. But we envision for some borrowers they may have three, four, in some cases five or six months of arrearages, again which can be refinanced into the FHASecure product, assuming that, again, it meets that three percent minimum requirement. And I'm sorry. What was your next question?
MS. LANE: And as far as the credit score, is there a particular credit score you're looking for?
MR. MONTGOMERY: Well, today, total -- FHA has a product called Total Scorecard, and while a FICO score is one of the variables, it's not the sole variable. So it could all -- it'll look -- we'll look at other factors, like we do today -- debt to income ratios, things of that nature. So there's not necessarily a FICO score cut-off.
MS. LANE: One other question. Where's the financing for this program coming from, the FHASecure program?
MR. MONTGOMERY: Well, I'm glad you brought that up. FHA is a you-pay-for-it program. The borrower, for years, since FHA was first founded, pays for the mortgage insurance, which FHA provides. They then -- they get the actual mortgage through one of our FHA-approved lenders, whether it's Wells Fargo or Bank of America. So again, it's something that they actually pay for. There's no cost to the taxpayer other than I pay my employees and need IT system upgrades and all that.
MS. LANE: Okay. Thanks.
MR. MONTGOMERY: Thank you.
OPERATOR: Our next question is from Jennifer Bjorhus from the St. Paul
Pioneer Press. Go ahead.
MS. BJORHUS: Hi, Commissioner. Thank you. Just a couple of questions. So you can be six months late on payments and still qualify and roll those payments into the REFI?
MR. MONTGOMERY: Again, it depends on how that matches up to your three percent equity. It could be even a little more than that. Again, it just all depends on where you are and how much equity you have in the home. We don't expect that a lot of them will be six months, only because a lot of these sub-prime mortgages have just started to reset. We expect that most will be somewhere around three -- two to three or four months.
MS. BJORHUS: And the three percent minimum equity, just so I'm clear. If you had that appraised then and that person is in such trouble they're under water in their home, they are not going to be eligible for this program?
MR. MONTGOMERY: Well, perhaps. There is a second part of the President's announcement today that Treasury has the action on regarding some relief to homeowners who are in that very situation, who may now actually owe more than the home is worth. Currently, if a borrower is facing that situation and the lender or servicer in this case buys down the loan or takes a short sale on it, that is recognized as a financial benefit to the mortgagor, to the borrower, and they will be subject to an IRS 1099 as a result of that.
Senator Stabineau from Michigan has introduced a bill that would mean that that sort of transaction would be exempt from that, and the President today asked others to support that bill, as he is. But right now, if a borrower is able to work it out with their lender buying down that loan, they could still apply for this, but again, they have to have that three percent equity component.
MS. BJORHUS: The last time that your agency was expanded like this -- this is a pretty significant expansion with all of these three different parts you're talking about, and I know the reform hinges on the bill passing, but when was the last time the FHA kind of was expanded like this?
MR. MONTGOMERY: You mean in terms of a new program?
MS. BJORHUS: Yeah, in terms of a program to expand the number of borrowers you can reach to this degree. Is this a - you know, first time since the '50s?
MR. MONTGOMERY: Well, are you there? For years, FHA has been sort of a garden-variety 30-year fixed rate product. We still are, and that will not change. This addition to what we think is a great suite of products is, for the first time in many years, FHA branching out. But as I referenced before, we think that's the role of FHA is to bring some stability to markets, and we think this is why we were founded, many, many years ago.
MS. BJORHUS: So it's fair to say, like, first time in decades. I mean, like, the biggest kind of expansion in decades? What kind of time frame can we put on that?
MR. MONTGOMERY: I'd have to talk to some people who have been here a little longer than I have. But if we could get back to you, Jennifer -
MS. BJORHUS: I'd appreciate that. Thanks.
MR. MONTGOMERY: We will do that. Thank you.
OPERATOR: Our next question is from Rucker Patrick from Reuters. Go ahead.
MR. PATRICK: Commissioner, hi. It's me again. Sorry. I just want to make sure. You seem to (inaudible) different numbers mentioned there. I thought we were talking about 160,000 next year, with the idea of helping 20 -- I'm sorry -- 60,000 more under this new Secure program. That would -- gets us 220,000; in that right?
MR. MONTGOMERY: I'm sorry. Let me split hairs with you again. The total is 240,000.
MR. PATRICK: Two hundred and forty. Okay.
MR. MONTGOMERY: And 60,000 of that would be borrowers assisted under FHASecure. 20,000 would be with the risk-based pricing.
MR. PATRICK: I've got you. Okay.
MR. MONTGOMERY: And then 160,000 we estimate we would have done anyway. Does that get you to the number?
MR. PATRICK: I've got you. Sixty -- under this new program; 20,000 under the risk-based pricing and then 160 - you would have been able to help anyway.
MR. MONTGOMERY: Exactly.
MR. PATRICK: Is it fair to say, if I've got this right, the Administration is proposing lowering this three percent threshold, which -- you know, you can imagine with a lot of sub-prime borrowers, particularly those that originated in the last year or two, having three percent - if they've furnished a hundred percent, getting the three percent in the last 18 months, it might not be that light -- that realistic for them. I think that the Administration's proposal would lower that threshold; isn't that right?
MR. MONTGOMERY: The FHA proposal, but that requires a legislative fix.
MR. PATRICK: Right. So it's -
MR. MONTGOMERY: Right.
MR. PATRICK: The same. But if the terms under which the Administration is proposing this thing were to go ahead, it would be able to help a lot more people because it would go -- this crucial three percent would be -- the threshold would be lowered.
MR. MONTGOMERY: Yes. Absolutely.
MR. PATRICK: And what is the Administration proposing to bring it to?
MR. MONTGOMERY: Well -
MR. PATRICK: Three percent to -
MR. MONTGOMERY: Actually, right now, we would go as much as a zero downpayment, but again that would be based on a three percent premium, which we can't do today. But I do want to point out, though, that there would be a provision, though, that the borrower have some cash contribution -
MR. PATRICK: Okay.
MR. MONTGOMERY: Whether it's closing costs or some other contribution that the borrower does have some, so to speak, skin in the game.
MR. PATRICK: That's about it.
OPERATOR: Our next question is from Joe Adler from American Banker News. Go ahead.
MR. ADLER: Yes. Thank you, Commissioner. You were talking about the $417,000 limit in the bill. Would your support go even higher? I know Chairman Frank has talked about going at least as high as $500,000?
MR. MONTGOMERY: Well, right now, you know, for years, FHA has been indexed to the conforming rate. I would say for the time being, that's probably comfortable where we are. We just believe that in the higher cost states that we should be at a hundred percent of that figure, because keep in mind, you know, the median price in California is somewhere north of $540,000 I believe at last. So even at the 417 figure, there are still a lot of borrowers that we won't be able to help.
MR. ADLER: For some of these provisions that do not need congressional authorization, were there times previously when you considered them, and why are they being put into implementation now?
MR. MONTGOMERY: Yes, we did previously consider them in the FHA bill from last year. And again, we got very close last year because of broad bipartisan support in the House.
MR. ADLER: No -- but I mean certain measures that don't need congressional authorization, such as the risk-based pricing.
MR. MONTGOMERY: Well, we've been working on these for a few months, and since we are an insurance company, we needed to do some stress tests from an actuarial standpoint to make sure that -- since we are self-sustaining, that we could do these types of -- offer these types of products. So -- but we are able to announce it now, which is the important thing.
OPERATOR: Our next question is from Brian Collins from National Mortgage
MR. COLLINS: Hello, Commissioner. I had a question regarding the risk-based pricing proposal you were going to come out with. You said you're going to come out with it pretty soon?
MR. MONTGOMERY: Well, let me correct that if I could, Brian. We were going to put the notice out for public comment fairly soon, let's say within the next couple of weeks, if not sooner. We then have a 30-day public comment period for that. And then we go back and look at the public comments and then at that point we go forward. We require about 90 days from our lenders and out there to change their systems and for us to do the same. So we -- right now, we're targeting a January 1, 2008 effective date.
MR. COLLINS: So is this going to be a system that's based on credit scores or product type or what?
MR. MONTGOMERY: Well, it will be all sorts of variables, you know, going away from the one-size-fits-all product. Today, there will be a whole suite of different products that we can offer borrowers, assuming we get some flexibility in the downpayment requirement, through FHA, borrowers will be able to do what they do on the conventional market. Some want to put down less, so they would pay a little higher premium. Some want to put down more.
MR. COLLINS: Mm-hmm.
MR. MONTGOMERY: They would pay a lower premium.
MR. COLLINS: Okay. And the other question is, the President talked about more transparency in mortgage documents. He talked about fair disclosures of closing costs and the mortgage broker fees. Are you guys coming out with a RESPA proposal soon?
MR. MONTGOMERY: Yes, we will be. It'll be going to OMB more than likely within 60 days, and then at that point, you know, we will transmit it to the Congress. As you know, OMB has up to 90 days to review it. At that point, it would go to Congress for the required period of time and then -- well, we anticipate probably in early '08 that it would actually be put out for public comment.
MR. COLLINS: Early '08. Any other details you can provide about this proposal?
MR. MONTGOMERY: I'm sorry?
MR. COLLINS: Any details you can provide about this or scope of the -
MR. MONTGOMERY: Not at this point. Not at this point, but we will soon.
OPERATOR: Our last question is from Kevin Hall from McClatchey.
MR. HALL: Yes, hi. Thanks, Commissioner. I'll be the naysayer here I guess.
How do you characterize this 240,000 in the context of the total problem? The Center for Responsible Lending and others talking about 2.2 million foreclosures, about two-thirds of the sub-prime loans in '05, '06 were exotic adjustable rates.
So are we talking a drop in the bucket? Are we talking a significant portion? Help us put this in context of how many people you're really going to be able to reach.
MR. MONTGOMERY: Well, within that 2.2 million are folks who did speculative investments with the sub-prime loan. There are people who bought a second home, a vacation home, with a sub-prime loan. There are also people who were able to work out with their current lender more favorable terms.
And, yes, like happens in the conventional market there will be some that go to foreclosure. So we think ultimately there may 600,000 to 700,000 that we could assist through this program. We think that if we get to -- by the way, that 600,000 to 700,000 is over about a two-year period. We think we'll be able to get to 240,000 within the fiscal year.
So doubling that figure, we get much closer to it, but unfortunately, there will be some families that we won't be able to help.
FACT SHEET: NEW STEPS TO HELP HOMEOWNERS AVOID FORECLOSURE