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On Friday President Bush announced that HUD's Federal Housing Administration (FHA) will help an estimated 240,000 families avoid foreclosure by enhancing its refinancing program effective immediately.  The program is called the FHAsecure plan.  Whether or not it will truly help the people who need it remains to be seen, but here are a few highlights:

• The mortgage being refinanced must be a non-FHA ARM that has adjusted and the borrower must be in default.
• The borrower must have been making on time payments on the mortgage prior to the time it adjusted.
• The lender must be able to determine that the reason for the late or missed payments is that the borrower's mortgage payment increased.  They must also determine that there is sufficient income to make the payments with the new FHA insured lender.

What about those folks whose value dropped and now owe more on their mortgage then their home is worth?  FHA will will insure the first mortgage even if the existing lender has to write off a portion that cannot be refinanced into the FHA mortgage.  The new lender may even take back a second lien to include closing costs, arrearages or the previous secondary financing.

What if the total loan size exceeds FHA loan limits?  As long as the new FHA insured first mortgage meets the loan to value and loan size guidelines for FHA, the combined amount with the second can exceed it.  The borrower must qualify with both the first and second payment.

This is definately a step in the right direction.  It's not all-encompassing, of course, and won't solve everybody's problems, but it should give some relief to some strapped families.  It's not a hand out either.  It won't help irresponsible people who knew that at one point their payment would adjust and should have been paying their mortgage on time but didn't because they either just didn't care, or couldn't budget.  And it won't help those who couldn't seem to figure out that if their mortgage payment is $2500 a month and their household only brings in $2000 a month that maybe the house is too expensive for them.

It should, however, help folks who took an adjustable rate for reasons that made sense at the time, and based their decision on past performance of the local real estate market.  Many things occurred that caused housing values to go down--that's a topic for another blog--but most didn't expect it to drop as much as it did.  It was out of their control.  Some would argue, that hey, if that borrower made the decision to get an adjustable rate then he should live with it and suffer the consequences of having it.  Well, Bank Of America came in and saved Countrywide from going under even though Countrywide made the decision to offer stated income loans to borrowers with no savings, no down payment, no past rental payment history, and who never owned a home.  They didn't have to crumble as a result of their decision.  Why should a responsible--and I stress responsible--homeowner?

More information will be coming out after the holiday weekend on this initiative.  Right now it is only being extended to homeowners that are in default.  That means they have already missed 2 or 3 mortgage payments.  It won't help those that are struggling, but making it each month.  Maybe that's bad, maybe that's good, as it's meant to help those that truly are in dire straits.

Here's a question: How many lenders will really be on board with this?  Is it something they have to offer if they are an FHA insured lender?  Or is it subject to their own lender specific guidelines, sort of like how some lenders do not allow an FHA loan to be manually underwritten and others do.  Or how some do not lend on manufactured homes, even though FHA insures loans on manufactured.  Or some won't let a borrower use a grant as their down payment, even if it's allowed by FHA--and I'm not just talking about recently.  

The biggest problem lenders will have with this initiative is that, in some cases, they will be asked to lend more then what the property is worth.  Either that or the prior lender will have to take a loss on the portion that can't be refinanced into the new FHA loan.  Maybe an investor will come out that will offer seconds with payments deferred for 36 months. When the market picks up in a few years and everyone is scrambling to refinance out of those seconds, because of the high rates, that investor will make a ton of money.  Hmmmm.... 

It will be interesting to see how this initiative will morph over the coming weeks and months and how many families will benefit from it.  I hope it will do what it was intended to.