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FHA Say It Will Loosen Some Lending Rules

New rules may help some homeowners avoid foreclosure

April 9, 2008

Testifying before the House Committee on Financial Services, chaired by Rep. Barney Frank (D-MA), Montgomery said FHA will permit and encourage lenders to voluntarily write down some of the principal on home loans, to make it easier to refinance.

Frank and other Congressional Democrats have backed legislation that would allow bankruptcy judges to take that action, without consent from the lenders. In his appearance before Frank's committee, Montgomery said the FHA would also help homeowners with subprime loans transition to FHA loans, where possible.

"FHA will now back loans for borrowers who are financially capable, but who have a spotty credit record," Montgomery said. "To qualify for a standard 97 percent LTV loan, borrowers will still be eligible if they were late on two monthly mortgage payments, either consecutively or at two different times over the previous twelve months."

For borrowers who can't meet that standard, Montgomery said FHA will permit up to three months of delinquency. But in those cases, he said, FHA will limit the LTV ratio for these borrowers to 90 percent.

"We will permit and encourage lenders to voluntarily write down outstanding principal," he said. "Lenders will also be allowed to make other arrangements, including new subordinate liens, to fill the gap between an existing loan balance and the new loan amount, be it a 97 percent or a 90 percent LTV loan.

He also said the administration strongly opposes a proposed $10 billion in loans and grants for the purchase and rehabilitation of vacant, foreclosed homes.

The plan was advanced as a way to prevent real estate values from falling further, but Montgomery maintains the principal beneficiaries of this type of plan would be private lenders, who are now the owners of the vacant or foreclosed properties.

He also said his agency does not support proposals to create a system where lenders would have an opportunity to sell bad loans to FHA through an auction process, clearinghouse, or some other wholesale mechanism.

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