The Housing Stimulus Bill gives the FHA and Ginnie Mae the challenge of leading the country out of a mortgage crisis.

It's the bottom of the ninth inning in Game 7 of the World Series. The game's tied up, Team U.S.A. is batting, there are two outs, and the FHA is waiting patiently in scoring position. Team U.S.A. fans watch nervously as Ginnie Mae-an undersized, unlikely hero who's barely out of the minors-steps up to the plate.

Cleaning up the MBS mess

In the wake of too many mortgage-backed securities (MBS) gone bad, investors are flocking to Ginnie Mae. The government agency doesn't issue MBS, but she does guarantee them. And that guarantee is worth a lot these days, now that investors have realized how easy it is for homeowners to default. This intensified demand has caused Ginnie Mae's workload to increase fourfold in the past 12 months.

Now, another mortgage industry development is likely to stretch Ginnie even further. The agency works alongside the FHA, generating liquidity by shuttling more than 95 percent of FHA loans into those guaranteed MBS. The Housing Stimulus Bill sets up the FHA to increase its activity dramatically, making new loans and facilitating workouts of troubled ones. As the FHA's workload increases, so will Ginnie's.

FHA ready to score

The Housing Stimulus Bill sets out some big changes for FHA mortgages. Modification of the maximum loan limit radically increases the usefulness of the FHA's program. Earlier this year, the limit was doubled, from about $360,000 to roughly $730,000. This new limit, originally a temporary measure, will reset to about $625,000 on January 1, 2009.

The FHA now has the authority to facilitate refinance programs for at-risk mortgages. This workout program is available to homeowners who funded their mortgages between January 2005 and June 2007. These borrowers must convince the FHA that they can't afford to keep paying their mortgage as is, and they must also get approval from their existing lender, who's likely to cooperate only if they stand to lose more by declining the workout. Once the prerequisites are satisfied, the borrower can trade in the expensive mortgage for a more affordable, fixed-rate, 30-year FHA mortgage. The new loan will not exceed 90 percent of the home's appraised value.

Much of the program sounds like a dream for strapped borrowers, but there are costs involved, too. Homeowners who are approved for the plan will be required to share their home's equity appreciation with the FHA. The percentage of profits to be shared ranges from 50 to 90 percent, depending on how quickly the home is sold.

Overburdened homeowners are likely to pay the price without question. The big question will be whether lenders cooperate. The feds believe that lender cooperation might be the pitch that Ginnie and Team U.S.A. need to send the FHA sliding in for the score.

Published on September 6, 2008