The latest iteration of housing assistance announced by the Obama Administration has turned up the volume on the “worthiness” argument. 

Critics see struggling borrowers being bailed out for what they believe was reckless behavior by both lenders and home buyers.   Many skeptics feel this group of borrowers did not play by the “rules,” and now everyone who did is being forced to bail them out.  Why do they get a lower interest rate for their irresponsible decisions?  Why isn't my loan principal being reduced? 

Others ask why the government is taking on more risk by refinancing high loan balance borrowers. These are distressed homeowners who live in one of the 75 HUD specified high-cost loan limit counties.  This pool of borrowers is able to rate/term refinance up to a $729,000 loan amount. These limits were set to expire at the end of 2008 but instead were extended two years by Congress.  Most housing experts expect the loan limits to drop significantly in 2011 even though the percentage of mortgage activity at these levels is a small percentage of FHA’s entire book of business. 

And then there are those who bought their home at the worst possible time (when the market reached its apex) and are now attempting to survive in a very difficult economic landscape.  They weren’t reckless speculators or searching for a “get-rich quick” scheme (most of those were foreclosed on months ago).   More than likely they were a rental family looking for their version of the American dream.  For too many that dream is now their worst nightmare. 

These are well-reasoned concerns, but what is the alternative – mass foreclosure?  Can the nation endure a few million more foreclosures?  Of course not as that would only imperil what has been a measured and unpredictable housing recovery.

The FHA is rightfully trying to help the borrowers who can still be saved.   Assisting at-risk borrowers especially during trying economic times is one of the primary reasons FHA exists as a government entity.  It is not chasing profits or trying to push a stock price to a 52 week high—it is simply trying to do what it does best for housing.  And even though these homeowners may be deemed “risky,”  I remind you that these borrowers must still pass FHA’s underwriting process which include:

  • Be current on existing mortgage
  • Proof of wages
  • Stable employment history
  • New appraisal must be obtained. New loan to value can be no higher than 97.75%.
  • Must occupy the home as their primary residence
  • New Front Ratio limit is 31%. Maximum back ratio is 50%

As a kid, I can remember riding through a stretch of desolate Texas highways where one large sign ominously warned: Last Gasoline Station for 200 Miles Exit Now.  If you’re an at-risk borrower and your options are few, now is the time for you to exit – this latest effort by the FHA could be your last chance.