FEDERAL HOUSING ADMINISTRATION TO PROVIDE SAFETY NET

From USA Today:

President Bush announced a series of "limited" steps Friday designed to help homeowners struggling to pay their mortgages, expanding the role of the Federal Housing Administration and proposing a temporary change in tax law to prevent people from being penalized when they refinance risky "subprime" adjustable-rate mortgages.

Under Bush's proposal, an estimated 80,000 homeowners with bruised credit and subprime ARMs they can no longer afford will be able to refinance loans, which the Federal Housing Administration (FHA) would insure.

The move marks a historic expansion of the role of the FHA, a Depression-era agency that has traditionally served low- and moderate-income families and first-time buyers, but not delinquent borrowers. Nearly 16% of subprime borrowers are behind on their ARMs, and an estimated 2 million subprime ARMs totaling about $600 billion will reset to higher rates through the end of next year.

To qualify for the new benefit, homeowners would have to prove they paid their loan on time before it reset to a higher rate and must have at least 3% equity in the home.

Under current rules, the maximum loan the FHA can guarantee is $202,000 in most states and up to $362,000 in high-cost states such as California and New York.

Bush also called on Congress to pass his proposal to reform the FHA, in part by raising those loan limits to $262,000 in most states and $417,000 in pricier areas.