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HUD Secretary unveils foreclosure prevention program in Detroit
date: July 9, 2008
SOURCE: Oakland Business Review
By: Carol Marshall
Steve Preston has been on the job as the Secretary for the U.S. Department of Housing and Urban Development for a month. He chose Detroit, which he called "the epicenter of the foreclosure crisis," for his first major address as HUD secretary to announce an aggressive foreclosure prevention assistance program.
Under the program, HUD would enter a joint venture partnership to buy bad loans from lenders, Preston said at a July 9 Detroit Economic Club meeting. The program will start in Detroit, one of the country's hardest-hit foreclosure markets.
"Traditionally, when all FHA loss mitigation measures have been exhausted, lenders foreclose and then submit a claim to FHA," Preston said. "Under this program, we will create a means for lenders to sell their non-performing mortgages before foreclosure to HUD and a joint venture partner."
The joint venture partner will buy the loans at significant discounts and will then service them.
Stopping foreclosures may help the troubled housing market stabilize, he said, at a time when the market remains on the brink of future disaster.
Experts estimate as many as 2.5 million foreclosure filings this year, Preston said, compared to 1.5 million in 2007. The average is 650,000. Housing prices are down between 4 percent and 17 percent nationwide. At the same time, lenders have pulled back from originating loans, which are at their lowest levels since 2000-2001.
In Oakland, Wayne, Macomb, Livingston and Washtenaw counties, there are some 40,000 houses on the market now, representing a 17-month supply, well above the national average of 9.6 months. A six-month supply is considered normal, Preston said.
'This is tough on families, very tough," Preston said.
In some parts of the country, the market was impacted by the housing bubble. But in Michigan, fundamental economic challenges prevail.
"Subprime lending is not in and of itself a bad thing," Preston said. "It has been the path to home ownership for very responsible people. But irresponsible behavior has led to a dangerous proliferation in the market."
There is $1.3 trillion in outstanding subprime loans - about 12 percent of the market, but more than half of the foreclosures.
Subprime adjustable rate mortgages represent 6 percent of outstanding loans, but more than 40 percent of foreclosures, with more than one in four of those mortgages currently more than 90 days past due or in foreclosure.
The worst may be yet to come.
"We have another $150 billion in subprime ARMs resetting in the next 18 months," Preston said. "We're right in the middle of that reset period of time. We have to understand that we will continue to be flooded with a need to work out these loans."
That's where the government has been at the center of the solution, Preston said. Government supported lending is essentially the only source for non-jumbo loans. FHA loans Fannie Mae, Freddie Mac and the Federal Home Loan Bank have absorbed the retreat of the private sector, he said.
But HUD needs to protect itself as well, Preston said. So the department is pushing to institute risk-based pricing on FHA mortgage insurance.
"FHA will price the insurance premiums for borrowers according to their credit risk," he said. "Today the typical borrower pays 1.5 points .... Riskier borrowers will pay 2.25."
He disputed critics' claims that risk-based pricing hurts low-income borrowers.
"The facts show the opposite. Risk-based premium pricing will actually benefit lower-income borrowers. Contrary to conventional wisdom, FHA families with lower incomes actually have higher FICO (credit) scores. They are hard-working people who live within their means and pay their bills," he said.
FHA has taken some measures already to try to stem the tide of the foreclosure crisis - temporarily eliminating the 90-day requirement for buyers to hold a property before selling; increasing FHA loan limits to as high as $729,000 in some areas of the country; and forming the HOPE NOW Alliance, which helps borrowers and lenders rework their mortgages to keep homeowners in their houses at rates they can afford; and establishing housing counseling programs.
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