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To many, housing aid is no help

WASHINGTON – Americans with mortgages exceeding the value of their homes face long odds of getting help under an expanded Bush administration program aimed at helping distressed borrowers.

With home prices declining rapidly in much of the country, nearly 9 million homeowners have mortgages equal to or greater than their home’s value, according to Moody’s The Bush administration’s expansion Wednesday of a program to help homeowners avoid foreclosure could help some of those borrowers, but it would require significant concessions by reluctant lenders and investors in mortgage-backed securities.

Those mortgage holders are not eager to reduce the value of a loan – and take the corresponding financial hit – unless they are certain that a loan is going into foreclosure, said Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md. trade publication. “I don’t think you will find a lot of lenders who will jump at this,” he said.

Plus, for many lenders, the risk that these borrowers will default on refinanced loans outweighs the potential for generating new refinancing fees, brokers say.

Without such a reduction in the amount owed, homeowners would need to come up with a 3 percent down payment for a refinancing – a tough proposition for many strapped borrowers. And if borrowers miss three monthly payments, mortgage investors would have to take a 10 percent cut on the value of their loan.

The Bush administration says 100,000 more borrowers would qualify for refinanced home loans through the Federal Housing Administration under new guidelines for a program dubbed FHA Secure. The new standards will help borrowers “who are financially capable, but who have a blemished credit record,” FHA Commissioner Brian Montgomery said Wednesday.

The FHA is a Depression-era agency created to help low and moderate-income Americans afford homes. The Bush administration said Wednesday that FHA Secure has helped nearly 150,000 borrowers, and will be on track to aid a total of about 500,000 by year-end. Democrats are backing a broader plan for the FHA to refinance loans for up to 2 million borrowers.

While FHA loans are insured by the government in the event of default, the mortgages themselves are made by major lenders such as Bank of America Corp. and Wells Fargo & Co., and are typically offered to investors as mortgage-backed securities by federal housing finance agency Ginnie Mae. The FHA currently insures 3.8 million loans.

The expanded FHA program, rolled out in August, was the first time the government had agreed to back loans for delinquent borrowers. The agency’s share of new mortgage loans – which was as high as 12 percent in the mid-1990s, fell to 1.8 percent in 2006 amid dramatic growth in subprime lending to borrowers with poor credit, according to Inside Mortgage Finance.

As the subprime market collapsed, the FHA’s market share rose to 4.5 percent of new home loans in the fourth quarter of 2007.