Will FHASecure Fix the Subprime Mortgage Mess?

Sunday, September 16th, 2007 at 12:27 pm By Carl Pruitt

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The crystal ball is a little murky on this issue. Many of the high loan to value subprime adjustable rate mortgages issued over the last few years were those referred to as “80/20’s”. This means a combination of a first mortgage for 80 percent of the sales price or home value and a second mortgage for the remaining 20 percent. The second mortgage was most often a fixed rate mortgage with a balloon payment at 15 or 20 years.

The HUD Mortgagee Letter states:

If the new maximum FHA loan is not enough to pay off the existing first lien, closing costs and arrearages, the lender may execute a second lien at closing to pay the difference. The combined amount of the FHASecure first mortgage and any subordinate lien may exceed the applicable FHA loan to value ratio and geographical maximum mortgage amount.

As usual with HUD this is left open to interpretation. Of course it has been allowable for quite some time under the standard FHA guidelines to have a second mortgage resubordinate even if the second mortgage is above 100% of the value. This has been valuable when the borrower has two mortgages, however there has been a decided and foolhardy lack of cooperation evidenced by the second mortgage holders. They often refuse to resubordinate with the result being a default on both mortgages. The second mortgage holder definitely ends up on the short end of the stick then.

With FHASecure, my bet is that bigger lenders who also do FHA lending will refinance their own subprime loans and hold back seconds for the balance. If only to avoid a default on their own books. However, there are a lot of subprime note holders who do not do FHA loans, or are even out of business. It will be really interesting to see how these lenders interact with other lenders and brokers trying to refinance these loans.