New Loan Modification Program Will Help Few, Experts Say

Expectations are low for the new homeowner assistance program launched last month by the Federal Housing Administration. The program promised to assist some 45,000 FHA borrowers, a far cry from the 850,000 who are behind or facing foreclosure.

The program will target borrowers who did not qualify for other government-backed home loan modification plans. Experts believe, however, that the decision to help fewer borrowers reflects the agency’s need to curb its spending and set more realistic goals.

The FHA takes a different approach from other Loan Modification Program plans. Under the program, the FHA will reserve up to 30% of the loan balance without interest; that is, a homeowner with a $200,000 mortgage will only get charged on $140,000.

The FHA had announced earlier this month that its financial reserves had reached below-mandatory levels, a first in the agency’s 75-year history. FHA officials say they won’t need government assistance any time soon, even as defaults continue to mount.

According to the Mortgage Bankers Association, about 17% of homeowners with FHA loans are in foreclosure or have missed at least one payment. By contrast, the default rate for other loan types is about 13%.

The FHA has said it will tighten controls on major lenders and target companies suspected of mortgage fraud. However, a large majority of FHA borrowers live in Ohio and Michigan, where the unemployment is a bigger problem than sub-prime lending.

Experts agree that the move shows how the FHA’s increasing dominance has also affected its vulnerability to the sub-prime boom. The FHA insures about 20% of new loans today, whereas it only handled 2% before the housing crisis.