Low expectations for mortgage help program

updated 3:34 p.m. ET Sept. 20, 2009

WASHINGTON - Dial back the pie-in-the-sky projections.

Last month, the Obama administration launched a program to help homeowners with loans insured by the Federal Housing Administration. About 850,000 FHA borrowers are behind on their payments or in foreclosure, yet the program will assist just 45,000.

The effort targets homeowners who were ineligible for the government's other loan modification plans. But the decision not to rescue more FHA homeowners reflects the Obama administration's need to protect the financial health of the agency, and to set more realistic goals for helping borrowers as its other loan modification programs fall short.

On Friday, the FHA said its financial reserves had sunk below mandatory levels for the first time in its 75-year history. While officials insist the agency won't require a taxpayer rescue, falling home prices, rising unemployment and shady lenders continue to drive up default rates.

Nationwide, about 17 percent of FHA borrowers have missed at least one payment or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

The FHA said it will raise the financial requirements for lenders and request annual audits, and it is cracking down on lenders suspected of fraud. But the agency's powers to modify more loans for distressed borrowers are being weakened by the poor economy.

FHA borrowers are concentrated in states like Michigan and Ohio, where job losses, rather than lax lending practices, are the main problem. And officials are weeding out borrowers who have too much debt.

"Stretching too far, not only risks taxpayer funds and greater losses than we would otherwise have ... it also is not good for those homeowners," said Shaun Donovan, President Barack Obama's housing secretary.

The new steps reflect the increasing dominance and vulnerability of the FHA. About 20 percent of new loans today are insured by the FHA, up from as low as 2 percent during the subprime loan boom.

Lou Tisler, executive director or Neighborhood Housing Services of Greater Cleveland, says FHA loans accounted for one in four of the foreclosures handled by his nonprofit in the 12 months that ended in June. That's up from about one in five the year before.

Many of those homeowners have lost their jobs and drained their savings and retirement accounts. Now they're out of options.

Lorrin Montag and his wife, Dianna, are fearful about their future. Their unemployment and disability benefits run out next year, and the couple's one-story manufactured home in Corona, Calif. is worth around $150,000, far short of their $280,000 FHA loan.

Lorrin, 65, has been out of work for nearly a year, after a back injury forced him to retire from his job as a truck driver. Dianna, 61, was laid off from her job doing computer-aided design at a maker of manufactured homes.

Their hopes were raised when she was brought back this summer to do some temporary work. But that ends this month.

While it might make sense just to walk away from their home and rent, Montag said, "we want to be able to live here the rest of our lives."

When the FHA was created in 1934, the U.S. housing market was in even worse shape than today. The banking industry was devastated, and the government stepped in to get home lending going.

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