FHASecure: Sub-prime fix, or fiasco?Chip Cummings, CMCFHA, HUD, delinquency or foreclosure, FHASecure program Everywhere you turn, all you hear about is the "mortgage meltdown." The world is coming to an end, and Mortgage Brokers are the root of all the evil, doom and destruction. Yeah, right. Then, out of nowhere, the Federal Housing Administration (FHA) rides up on a white horse and announces a new initiative designed to save 240,000 borrowers from foreclosure and rescue people from those nasty sub-prime loans that they fell prey to. Could it be possible? Well, yes and no. On Sept. 5 of this year, FHA released the details of the new FHASecure program (ML 07-11), touted as a way to refinance borrowers who are facing delinquency or foreclosure from payment increases due to adjustable-rate mortgage (ARM) interest rate resets. On the face of it, it sounds pretty good, but will it actually work? And if so, how? And with what investors? As a national FHA trainer, and one who has originated more than a few FHA loans over the past 20 years, I decided to dig into this new initiative and see if originators can actually fill up their pipelines with this creative program. The nuts and bolts To start, I analyzed the Mortgagee Letter (ML) itself, and then interviewed several people from the U.S. Department of Housing and Urban Development (HUD) and different national wholesalers to get a consensus on what the real deal is. I have held several Webinars on the topic and talked to originators around the country to get a take on how it's playing out in the real world. First, let's look at the specific requirements. The FHASecure initiative is open to any authorized FHA lender--so, actually, all of your current investors have access to the program, if they choose. The borrower must have a non-FHA ARM that has an interest rate that resets sometime between June 2005 and December 2008. In addition, they have to have had a good payment history for at least six months prior to the reset. But the borrower can actually be currently delinquent or even in foreclosure at the time of application, and you can roll in all the costs and overdue payments into the new mortgage amount! Sounds pretty good so far, but wait--it gets better. While the loan amounts and loan-to-value ratios (LTVs) are limited to the normal statutory limits, you can exceed those under certain circumstances. The lender can place a second mortgage for any costs and delinquent payments if it's necessary, and exceed 100 percent LTV or even the FHA county limits! To make it even easier, any payments on that second can be deferred, and not even counted in the ratios, but only if no payments are due for at least 36 months. Wow--sounds like a dream come true so far. In underwriting the loan, normal ratio guidelines of 31/43 are used, but they can be exceeded depending on compensating factors. But here's where reality starts to sink in: The major problem is that the likelihood of getting this loan through the automated underwriting system (TOTAL Scorecard) is remote at best. After all, the borrowers are probably pretty damaged at this point! This means almost all FHASecure loans will have to be manually underwritten. To make this loan program work, underwriters and processors will need to carefully examine and document the circumstances surrounding the borrowers' problems. Is it really due to the reset? Or are they just buying time? Careful examination of the credit and payment histories will reveal whether or not the new loan will save them, or just prolong the inevitable. Carefully document the entire situation. Look at other credit accounts and their long-term history. Did they just temporarily get in over their head, or is this a systematic problem? The borrower's employment history should be stable and indicate responsible spending patterns. If there are deeper issues causing the mortgage delinquency, then you have an obligation to counsel them to get it fixed, not just originate another commission. In addition, many of the properties may be located in "declining areas," which is the code name for appraisal problems. The ML actually addresses this as well and permits insuring of properties in those distressed areas, but the appraiser will have to clearly document the market conditions. Regardless, the lender is still held responsible for the quality of the appraisal. No special forms or disclosures are required to participate in the program, but the underwriter must make a comment on the Mortgage Credit Analysis Worksheet indicating that the loan was underwritten using the FHASecure guidelines, and specifically address the circumstances surrounding the borrowers situation. If the borrower is currently in a forbearance agreement, you need to document that all terms have been met in a timely fashion. Well, it sounds like there are a lot of borrowers we can help out there--what's the catch? The big problem The big problem is loss mitigation. While the program has great possibilities, FHA has forgotten one key element--who gets tagged with the losses? Most of the lenders and credit risk analysts I spoke with have one overriding concern: Am I just inheriting someone else's foreclosure, and how will that affect our overall performance numbers? This is a justified concern, and one that will jeopardize the success, or even implementation, of the program. There are still some details that remain a little fuzzy--and will remain so until we start to see some precedents being set. But the bottom line is that lenders don't want to get another loan on the books just to have it go into the real-estate owned portfolio. As a direct endorsement underwriter who underwrites the loan, who gets tagged for the loss when it goes south? What about my costs, time and secondary losses if the loan doesn't perform? These issues and more are being batted around in risk management circles around the country. Several investors have indicated that they will offer the program only to existing brokers who have a proven track record. Others are standing on the sidelines until FHA provides a little more support. Either way, the success or failure of the program will come down to the quality of the origination. There are borrowers who are hurting out there, many who have been taken advantage of or found themselves in circumstances that were beyond their control. Loan officers who carefully examine those circumstances and originate loans that fit the spirit and purpose of the FHASecure initiative will not only find their pipelines filled with profitable loans and happy clients, but will be the catalyst for the long-term success of the program. For too long, we as an industry have opened the door, which allowed a few bad apples to tarnish an entire loan category which, in most circumstances, has been an important part of creating new homeowners and building equity. Sub-prime loans serve an important and necessary market segment. Handled the right way, this new program offered by FHA can do the same thing. Let's make it work, and show the media the true nature of the professional Mortgage Broker. Note: To download a copy of the ML and other related FHA releases, go to www.fha-lending.com/webinar029. Chip Cummings, CMC is president of Northwind Financial Corporation, an international speaker, trainer and consultant to the mortgage industry, and author of "Stop Selling and Start Listening!--Marketing Strategies That Create Top Producers." He can be reached at (616) 977-7900 or at www.chipcummings.com.