JP Morgan Chase steps up with own foreclosure solution

Banker JP Morgan Chase, one of the stronger banks in the U.S., launched its own counter-offensive to address soaring foreclosures on Friday, including hiring more staff, a new review process to avoid unnecessary foreclosures and a moratorium on new default filings for 90 days until its plan is up and running. So will this plan work or is simply more smoke and mirrors? From a CNNMoney.com story:

The bank will step up its efforts to offer mortgage modifications for borrowers at risk, institute an independent review process to eliminate all unnecessary foreclosures and hire and train more staff to handle the added caseload that the plan will generate.

Most important, it will not put any delinquent loans into the foreclosure process during the 90 days it takes to implement its new plan.

JP Morgan Chase expects to help 400,000 families keep their homes during the next two years by working out $70 billion worth of loans. The company says its housing rescue efforts have already helped 250,000 families holding about $40 billion in loans.

Click here for full story.

BofA to slash mortgage payments for troubled loans

Bank of America has announced a drastic plan to address the toxic loans it inherited from Countrywide Financial, which is to slash mortgage payments or even reduce the principal balance owed so mortgage holders can stay in their homes and avoid foreclosure. CNNMoney.com explains:

A plan announced today by Bank of America will be the most aggressive foreclosure prevention effort ever undertaken by a U.S. bank.

The program, scheduled to start in December, will be open to distressed borrowers who signed up with Countrywide Financial between January 1, 2004 and December 31, 2007. Countrywide was acquired by Bank of America (BAC, Fortune 500) in July.

It came in a legal settlement that the company entered into with the attorney general offices of 11 states, who had sued Countrywide over predatory lending practices, but the company stated that borrowers in all 50 states will be eligible to participate in the program...

As part of the initiative, Bank of America will cut monthly housing payments, including mortgage, property taxes and insurance, to no more than 34% of gross income. The move is expected to help keep as many as 400,000 troubled borrowers in their homes.

The program targets holders of subprime adjustable rate mortgage (ARMs), subprime fixed rate loans and option ARMs, but prime and Alt-A borrowers, who did not document their income, will be eligible as well.

No other foreclosure prevention effort has aimed to keep borrowers' house payments so low...

By contrast, the much heralded foreclosure-prevention initiative announced in August by the FDIC for customers of IndyMac Bank, the subprime lender that the agency took over in July, said it will keep borrower payments to no more than 38% of gross income.

"This is the biggest mandatory modification of loans in U.S. history," said Jerry Brown, attorney general of California, the state with the largest number of borrowers who may benefit from the settlement. "Of course, we never saw such a big rip-off by any other company either."

According to Simon, the Countrywide program will proactively screen all of its borrowers for eligibility, and then contact them directly to offer loan workouts. No prepayment penalties or modification fees will apply. But the program can't help every Countrywide borrower. Some, because of illness, divorce, job loss and the like, simply won't be able to afford any reasonable mortgage payment...

As the credit crisis continues, more and more lenders and mortgage servicers are coming to grips with the fact that preventing a foreclosure is usually cheaper than going through the repossession process and then reselling the property in a declining market.

(DUH!)

Depending on each borrower's circumstances, Bank of America might freeze or lower a loan's interest rate or even cut the principal loan balance. The bank said it will also participate in the government's Hope for Homeowners program, a provision of the housing rescue bill which went into effect Oct. 1 and makes FHA-insured loans available for delinquent borrowers.

No, not another RTC-type bailout. Perhaps another "RFC," updated from the 1930s.

Despite the constant parade of "no bailout!" exclamations accompanying email signatures on blog comments and the efforts by certain members of the blogosphere to energize an anti-bailout crowd, it seems that the housing/mortgage/financial crisis is spinning out of control to the point that some point of bailout seems necessary (something unhappily predicted by this blog back in late 2007). How might it look? A story in the Wall Street Journal reviews:

The federal government is working on a sweeping series of programs that would represent perhaps the biggest intervention in financial markets since the 1930s, embracing the need for a comprehensive approach to the financial crisis after a series of ad hoc rescues.

At the center of the potential plan is a mechanism that would take bad assets off the balance sheets of financial companies, said people familiar with the matter, a device that echoes similar moves taken in past financial crises. The size of the entity could reach hundreds of billions of dollars, one person said.

Another proposal would be the creation of federal insurance for investors in money-market mutual funds, coverage akin to the insurance that currently safeguards bank deposits. The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.

In addition, the Securities and Exchange Commission is set to propose a temporary ban on short-selling. It's not clear how broadly the ban might extend, but it could apply only to financial stocks...

The administration had been taking a patchwork approach to the financial crisis, putting out fires as they ignited. The new moves represent an effort to take a more systematic approach, after a spiral of bad debts, credit downgrades and tumbling stocks brought down venerable names from investment bank Lehman Brothers Holdings Inc. to insurance giant American International Group Inc. Banks have grown unwilling to lend to one another, a sign of extreme stress, because financial markets work only when institutions have faith in each other's ability to meet their obligations.

Word of the plan came the same day as the Federal Reserve and other major central banks offered hundreds of billions of dollars in loans to commercial banks to alleviate a deepening freeze in the world's credit markets. That step appeared to have moderate impact on lending among banks. Meanwhile, a wave of redemptions continued hitting money-market funds, causing a second large fund to shut to investors...

The flurry of moves under discussion may bring the markets some breathing room, but it isn't clear whether they will amount to a long-term solution to the complex financial problems sweeping the market...

Treasury Department officials have studied a structure to buy up distressed assets for weeks, but have been reluctant to ask Congress for such authority unless they were certain it could get approved. The intensified market turmoil may have changed that political calculus, even with less than two months left until the November elections.

A big question still to be answered is how the government will value the assets it takes onto its books. One possible avenue could be some sort of auction facility, so that the government would not have to be involved in negotiating asset values with companies. Financial companies would likely take big losses...

Exactly how such an entity might be structured isn't yet clear. The possible plan isn't expected to mirror the Resolution Trust Corp., which was used from 1989 to 1995 during the savings and loan crisis to hold and sell off the assets of failed banks. Rather, a new entity might purchase assets at a steep discount from solvent financial institutions and eventually sell them back into the market.

The program may look more like the Reconstruction Finance Corporation, a Depression-era relief program formed in 1932 by President Hoover that tried to inject liquidity into the market by giving loans to banks and other businesses.

According to a top congressional aide, the Treasury department wants authority to either control the program or have it be a separate division of the government...

Thursday, Republican nominee Sen. John McCain sought a broad expansion of government regulation over financial institutions, including the formation of a body to both assume distressed mortgages and help failing investment banks.

Saying the government cannot "wait until the system fails," Sen. McCain called for the creation of an entity that would essentially help companies sell off bad loans and other impaired assets. It is unclear how the body, dubbed the Mortgage and Financial Institutions trust, would operate, including whether or not institutions would seek help or whether the government would intervene on its own behalf.

His rival, Democratic Sen. Barack Obama of Illinois was less specific about what steps he would take, offering broader outlines of policy proposals that included a "Homeowner and Financial Support Act." The measure, which would inject capital and liquidity in the financial system, is designed to provide a more coordinated response than "the daily improvisations that have characterized policy-making over the last year."

Can't wait for those debates!

Lenders mostly dismiss "Hope for Homeowners" Bill

Remember that huge housing bill passed by Congress in July in which the FHA would re-write toxic mortgages if lenders would only reduce loan balances by 10%? Apparently lenders are saying "Thanks for thinking of us, but no thanks, we'll do our own workouts. Have a nice day!" From a CNNMoney.com story:

As part of the massive housing rescue bill passed by Congress in July, troubled borrowers will be able to refinance their home loans with the backing of the Federal Housing Authority (FHA) starting on October 1.

But at a congressional hearing today in Washington, lenders didn't seem terribly enthusiastic about the program, dubbed Hope for Homeowners.

The program calls for lenders to voluntarily refinance delinquent mortgages by reducing loan balances to 90% of a home's current market value. The new loans will be backed by the FHA, which will be receive 5% of the new loan balance as a payment from the lender...

Bank of America (BAC, Fortune 500) managing director Michael Gross said that the new FHA program was just one of many loan workout options that the bank is employing.

And he stressed that the bank's own efforts to save troubled loans, especially those B of A inherited when it bought Countrywide, have been successful. He said that the bank increased its loan modifications by 450% this past August compared with August of 2007.

When asked whether the program would be considered a last resort by lenders, all the members of the panel, including Gross, agreed that it would be.

And Mary Coffin, speaking for Wells Fargo (WFC, Fortune 500), testified that relatively few of her bank's borrowers owe more on their mortgages than their homes are worth, meaning they would be unlikely to benefit from the FHA's refinancing and write down program...

Even Sheila Bair, who heads the Federal Deposit Insurance Corporation, praised the FHA program but said that few borrowers with IndyMac, the bank that the FDIC took over in July, would use it.

She said that her responsibility to maximize profits for the investors would probably limit the number of IndyMac borrowers who would take advantage of Hope for Homeowners

States trumping the feds on providing mortgage aid

Growing weary of waiting for the glacial pace of the federal government to address the mortgage crisis (it wasn't until last week that the Fed even admitted there was a recession), state governments are jumping in with aid even if it means conflicting with mortgage lenders. From a Wall Street Journal story:

State governments are acting more aggressively to help homeowners avoid foreclosure, frustrated by what they view as the federal government's inadequate response to the mortgage crisis. But some of the programs are putting states at odds with mortgage lenders.

Ohio officials announced Tuesday that they had enlisted more than 1,000 local attorneys to work with certain borrowers free of charge to try to block foreclosures.

Wednesday, an Illinois lawmaker introduced a bill, backed by the state's governor, that would impose a moratorium of as long as 60 days on foreclosures. The measure would apply only to borrowers who enter housing counseling and is meant to give them more time to work out a deal with lenders.

Maryland Gov. Martin O'Malley signed emergency legislation Thursday to give borrowers at least 150 days to cure defaults, effectively creating a short-term moratorium on foreclosures. The state also is requiring mortgage-servicing companies to provide the names of borrowers whose adjustable-rate mortgages are about to reset to higher rates, and it is asking companies to stop levying late fees and other charges on borrowers whose request for a loan workout is being evaluated.

The state actions come as Congress considers a variety of plans to aid the housing market, including a $15 billion plan that includes a tax credit to buyers of properties facing foreclosure and grants for communities to buy and refurbish foreclosed properties. But there is little in the plan that would help individual borrowers facing foreclosure, and state officials say they can't wait for federal help...

These latest efforts by states are more aggressive -- and in some cases more controversial -- than earlier programs, most of which provided counseling services or offered to refinance certain home loans into state-backed mortgages with better terms. However, the counseling and refinancing programs aren't helping as many homeowners as hoped, in part because borrowers seeking state help tend to be in such bad financial shape that their situations don't lend themselves to easy solutions.

As a result, the programs are targeting more troubled borrowers. Beginning May 1, borrowers in Massachusetts will have 90 days to cure any defaults before their mortgage company can initiate a foreclosure. Massachusetts officials have already obtained 30- to 60-day delays in the foreclosure process for more than 630 borrowers facing the loss of their homes. More than half were able to avoid foreclosure through modifications, refinances, short sales and other initiatives, state officials say.

Under Ohio's new legal effort, pro bono attorneys will counsel certain homeowners facing foreclosure, try to broker deals with mortgage companies, and represent borrowers in mediation or in court.

"There are defenses to many more of these proceedings than we ever thought," said Ohio Attorney General Marc Dann. For instance, the party bringing the foreclosure action may not own the mortgage, he said, or attorneys may be able to show that the mortgage was "fraudulently induced."

Such efforts "will help promote the conversation between borrowers and lenders," said Paul Richman, vice president of state government affairs for the Mortgage Bankers Association. "It's something we don't have a problem with so long as it's not being used to create unnecessary and frivolous delays in the legal process." However, the association opposes foreclosure moratoriums.

Paul Krugman on the housing market

Princeton economist and New York Times columnist Paul Krugman is interviewed in the current issue of Fortune magazine. He's predicting housing price declines of 25% to 50% not based on the prices and incomes, but prices in relationship to potential rental income (which I also think is a much better barometer than incomes alone). So how bad does he think the mortgage crisis will get?

I think home prices will fall enough for us to produce about 20 million people with negative equity. That's almost a quarter of U.S. homes. If home prices are rising, or if there's positive equity, you can refinance or sell. But if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away...

I still think the estimates people are putting out there - $400 billion or $500 billion in losses - are too low. I think there'll be $1 trillion of losses on mortgage-backed securities showing up somewhere...

My preferred metric is the ratio of home prices to rental rates. By that measure, average home prices nationally got way too high. We'll probably basically retrace all that. So that's about a 25% decline in overall home prices. Only a fraction of that's happened so far. Of course, it varies a lot. In places like Houston or Atlanta, where home prices have not risen much compared with underlying rents, the decline will be relatively small. In places like Miami or Los Angeles, you could be looking at 40% or 50% declines...

And yet, that will still vary greatly depending on location, product type and the existing relationsihp between prices and potential rents.

People at the Fed are talking about feedback loops. At the moment, most of what they're concerned about is that falling home prices are leading to a credit crunch, which is actually driving up mortgage rates and making mortgages unavailable, which is causing home prices to fall even more. I'm not one of those people who thinks the Great Depression is coming back, but there's lots of echoes...

The financial stuff looks like a combination of 1990 and 2001, and probably bigger than both combined. You've got the financial disruption, which is probably bigger than the savings and loan crisis. And you've got the loss of wealth from the housing bust, which is bigger than the dot-com bust. So this looks fairly nasty. And then everybody who's paying attention is worrying about the Japan analogy. Japan never had a really severe recession. It just started with a recession and never really had a recovery for a whole decade. And that's the kind of thing we're afraid of...

The effective borrowing costs for a lot of people are rising, not falling, despite the Fed cuts. The rising spreads are more than offsetting it. The mortgage rates have not been falling as you might hope. And, of course, for many types of people who were able to borrow two years ago, they now can't - at any interest rate. We're looking at the classic pushing-on-a-string problem, where the Fed can cut, but it's not clear it does much for the real economy...

What Greenspan did not do was listen to warnings about subprime. The Fed had substantial regulatory and moral-suasion power. They could have done a lot to limit the excesses. It's more what he failed to do during the boom than what he did in response to the last slump...

The inflation happening right now is not being fed by expectations of inflation - there's no self-reinforcing process - it's just mostly commodity prices going through the roof. That's not pleasant, but it's not something the Fed needs to be all that worried about, as long as it stops there...

I look at the euro at $1.53 and cheer - not for this European trip I'm planning to take after classes are done. But for manufacturing plants in the Midwest, it's a very good thing. Arguably the only good thing we have going for the U.S. economy now is the weak dollar and how that helps exports...

I'm looking at the increase in interest-rate spreads, with the LIBOR (London interbank offered rate) pulling away from U.S. Treasury bills. When the spread gets that big, it suggests that banks are losing trust in each other. Various measures of panic in the markets are looking bad again. I've been thinking to myself, This is now the fourth wave. We had a first wave more than a year ago, when subprime first began to go. And everyone said that was contained. We had a second wave last August, when things started going to hell. We had a third wave late in the fall, and heroic efforts seemed to bring the problems under control. And now here we go again. This is starting to look like a much more comprehensive financial crisis...

It seems to me like every few weeks there's another $300 billion market I've never heard of that has just collapsed. And there's credit cards, auto loans - I don't know what's next. But it's clear we're going to have a commercial real estate crash not too far short of the severity of the housing crash...

If you look historically at other financial crises, they typically end up with big government bailouts. But how's that going to work in this case? We don't even know who to bail out. And part of the problem is we don't even know who owes what to whom...

How much in the end does the ability of consumers to keep spending get affected by what's going on in fairly abstruse financial markets? So I'm not quite sure how this works. Maybe that's a reason for hope. Maybe it'll turn out that all this Wall Street stuff is just less important than we think it is.

Like it or not, more government rescues are on the way

Despite the public outrage that will inevitably arise from a government (and thus taxpayer) bailout of Wall Street firms and borrowers caught up in the mortgage crisis (rumor has it homebuilders have been told not to expect much, if anything, from the White House), it looks like a series of smaller bailouts (such as Bear Stearns) will ultimately result in a much larger rescue. For renters waiting to pounce on heavily discounted homes, that may come as bad news, and they continue to rally against a bailout. But what they don't understand is the consequences of doing nothing is far more important than their desires to (a) allow the market to punish the greedy and the stupid; and (b) snap up a bargain once the dust has settled. From an article in the L.A. Times:

...some experts say Bear Stearns' woes warn of potentially larger calamities that will severely test the Fed, the economy and, ultimately, taxpayers as the government gets more deeply involved in fixing the markets' troubles.

"We will lose, in some form, several major financial institutions before this is over," said veteran economist Allen Sinai of Decision Economics Inc. in New York.

The heart of the problem is that the nation is living through an unwinding of a 25-year-long, consumer-led borrowing binge. Bear Stearns was a key player in financing that binge, most notably in high-risk mortgages...

"We have far too much leverage in the system, and we're now in the process of de-leveraging," said Tom Atteberry, a money manager at investment firm First Pacific Advisors in Los Angeles. "We think there's a lot more to go."

That mentality is widespread, and it is feeding on itself: Investors don't want to pay current market prices for mortgage-backed bonds and other debt because they worry that more borrowers will have trouble making payments. That further shuts down lending, making credit tighter and squeezing more borrowers...

At times like this the focus for Wall Street firms primarily is on surviving. No bank or brokerage will lend to a peer, even in routine daily transactions, if there is any doubt at all that the borrower can repay. Failure then can become assured once rumors start about a firm...

Wall Street's propensity to abandon its own has sunk all sorts of financial institutions over the last century. In 1984 the government had to rescue Continental Illinois, then the seventh-largest bank, once creditors pulled the plug. Brokerage Drexel Burnham Lambert Inc. failed in 1990 after its funding lines were cut...

But the current crisis is far larger in scope than those. Because so many banks, brokerages and investors were involved in financing the recent real estate boom -- the biggest housing bubble ever, by many accounts -- the growing problem of mortgage defaults infects nearly every corner of the financial system...

That is why a bailout is becoming more of a certainty --when the U.S. economy is at stake, politicians have no choice but to risk the ire of angry renters who don't support such a move by risking their tax dollars.

Across Wall Street, there is a widespread belief that the Fed's use of its own capital to shore up Bear Stearns is just the first step toward an eventual government bailout of the housing market.

"The history of major financial crises is that the government is going to come in at some point," said Richard Sylla, a professor of financial history at New York University.

Stronger rules for the mortgage market

Hoping to put safeguards in place that would eliminate any more mortgage and credit crises in the future, the Treasury Secretary Henry Paulson announced a series of new rules that would prevent another mortgage meltdown from occurring. From a story in the New York Times:

The nation’s top economic policymakers, hoping to prevent a repeat of the excesses that led to the mortgage bubble and bust, on Thursday proposed a broad series of reforms aimed at tightening oversight of financial institutions.

The changes include tougher disclosure requirements for banks and Wall Street firms, a nationwide licensing system for mortgage brokers and new rules for credit rating agencies, which have been widely criticized for failing to recognize major problems with mortgage-backed securities and for having potential conflicts of interest....

Mr. Paulson said the government was going to demand greater “transparency” from banks and Wall Street firms, stronger risk management and capital management and a better trading system for complex financial derivatives, such as collateralized debt obligations, that managed to transform risky subprime mortgages into securities with Triple-A ratings.

Echoing measures that Congressional Democrats have been drafting, the presidential group called for tougher state and federal regulation of mortgage lenders and a nationwide set of licensing and registration standards for mortgage brokers...

Mr. Paulson took particular aim at credit-rating agencies, such as Moody’s, Standard & Poor’s and Fitch, which gave AAA ratings to billions of dollars in mortgage-backed securities that turned out to be filled with delinquent loans.

Mr. Paulson said the rating agencies would have enforce policies about disclosing their conflicts of interest, an allusion to criticisms that the agencies were typically paid for their ratings by the investment banks who only paid once they had sold their securities to investors.

In addition, Mr. Paulson said the president’s group would push the rating agencies to “clearly differentiate” between the ratings for complicated structured investment products, which investors may not have understood, and the ratings for more conventional corporate bonds and municipal securities.

Issuers of mortgage-backed securities, in turn, would be required to disclose “more granular information” about the quality of the underlying loans and their procedures for verifying the information in those loans...

Senator Charles E. Schumer, the New York Democrat who is a member of the Banking, Housing and Urban Affairs and Finance committees, was both positive and critical about the proposals, saying in a statement: “The administration is finally moving towards where Congress was last year. The good news is, they’re beginning to put their toe in the water when it comes to government involvement to help the economy.

The bad news is, they’re going to have to do a lot more than that to address the problem. We need government action not only to solve the current crisis, but also to prevent a future one.”

Appraisal reform to raise overall fees to borrowers

The good new is that reforms for the appraisal of residential properties will increase the objectivity of the process. The bad news is that it's going to cost borrowers more, mostly because a new appraisal will be required for each application, which mortgage brokers say will make them less competitive because they often submit to multiple lenders. But change may be on the horizon in terms of technology, with a start-up firm proposing to create a database of existing appraisals much like the business model for credit reporting bureaus. From a CNNMoney.com story:

In a recent agreement with New York State Attorney General Andrew Cuomo, Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500) pledged that they will only buy mortgages from lenders that use independent appraisers. Since these two companies account for more than 70% of all mortgage loans, virtually all lenders will comply with the guidelines.

Inflated home appraisals were a big part of what helped fuel the current housing bubble. For years, appraisers were pressured by mortgage originators, real estate agents, home sellers and borrowers to over-value the homes they appraised....

But while eliminating mortgage fraud will be good for the real estate market in the long haul, this reform will come at a cost to consumers.

Right now, mortgage brokers need just one appraisal for each deal. The broker can then include it with applications to as many lenders as they'd like.

But beginning in 2009, brokers won't be permitted to do that. A different appraisal will have to be ordered by each lender that a borrower applies to. That cost is then passed along to the applicant...

Mortgage brokers could avoid multiple appraisal fees by applying to just one lender at a time; if the first lender approves the loan, then the borrower won't need to pay for any more appraisals.

But submitting applications one at a time can take a lot of time, and some consumers could lose the lower interest rates they had locked in for 30 days.

So while previously the appraisal process might cost buyers about $400, it could end up costing anyone who needs to shop around for a deal - perhaps half of all buyers - as much as $1,000-$2,000.

Mortgage brokers also fear the Cuomo pact will drive borrowers to deal directly with lenders, putting some brokers out of business. They say that will eventually drive up borrowing costs by shrinking competition...

Thomas Inserra, an appraiser and CEO of Zaio, which is creating a national database of home evaluations, and who has testified about appraisal abuse before Congress, has what he considers the most comprehensive and elegant solution of all.

He thinks appraisals should be handled like credit reports, with all home values stored in a giant database that can't be altered by any of the parties in a transaction. This, he said, would ensure accuracy and transparency.

House values would only change only as market conditions dictated or with physical alterations of properties. And, it would be fast.

"By storing compliant appraisals in a database like a credit bureau stores credit scores, Zaio is now delivering appraisals to lenders in seconds rather than the normal five to seven days," said Inserra.

And THAT, in my opinion, is a great idea.

A $1 trillion government bailout by Halloween?

According to a recent post on the Seeking Alpha blog (one of my favorites as well as one of the most respected on the web), the Financial Times is reporting in a video interview with George Magnus, UBS senior economic advisor that we can expect a bailout by October (just in time for the election!), something we've been predicting at Housing Chronicles since the beginning of the year. How big a bill will this be? Try $500 billion - or maybe even $1 trillion:

FHA to the rescue

Created during the Great Depression to create a market for mortgages insured by the federal government, the Federal Housing Administration (FHA) became mostly forgotten during the last housing boom (I actually used an FHA loan to buy my first condo in 1990). Although the program only requires a 3% down payment, its underwriting guidelines are a bit stricter than those for conventional loans -- especially those of the subprime variety -- and so both lenders and mortgage brokers weren't pushing them. But now the FHA may be the government's best hope of addressing the credit crunch without creating a new bureaucracy:

Home loans insured by the FHA have become the cheapest and, in many cases, the only alternative for borrowers who can make only a small down payment. The agency is rapidly gaining market share as government-sponsored mortgage investors Fannie Mae and Freddie Mac, stung by combined losses of about $9 billion in last year's second half, back away from credit risks by adding fees and demanding higher down payments.

The FHA doesn't make loans but provides insurance, which covers the risks of default for lenders or investors who own loans. That insurance is akin to the guarantees provided by Fannie Mae and Freddie Mac.

Policy makers see the FHA as one of the handiest tools available to keep money flowing into mortgages at a time of growing anxiety about the effects of soaring defaults and falling home prices...

"The FHA's role is going to be huge," says Brian Chappelle, a mortgage consultant who was a senior FHA official in the early 1980s. Some lenders expect the FHA to account for as much as a third of new mortgages by the end of this year, Mr. Chappelle says. That would be up from a low of 1.8% of single-family mortgage originations in 2005 and 2006, according to trade publication Inside Mortgage Finance.

The agency has long been seen as a means to help lower-income borrowers but now attracts some well-heeled people, too. At Toll Brothers Inc., a builder of homes with an average price of around $650,000, executives say more of their buyers may soon be using FHA-insured loans.

The FHA is in some ways returning to its roots as a broad-based tonic for the housing market. When Congress created the FHA in 1934, many banks were failing and housing production had collapsed. Initially, the FHA could insure loans of as much as $16,000, or about triple the median home price at that time, allowing it to serve most of the market. Congress in later decades directed the FHA to concentrate more on the entry-level housing market.

Over the past four months, Fannie and Freddie have imposed fees that lenders have to pay upfront so that loans can be guaranteed by the two companies. Those fees are passed on to borrowers and typically result in slightly higher interest rates. Fannie and Freddie also have increased down-payment requirements in areas where house prices are falling. The FHA hasn't changed its terms and allows down payments as small as about 3% nationwide.

FHA loans now are slightly cheaper than conventional loans backed by Fannie and Freddie, a reverse of the normal situation. Last week, the average rate on FHA loans was 6.29%, while conventional loans were at 6.36%, according to HSH Associates, a publisher of financial data.

The FHA's broader role exposes it to more risks, stirring fears that taxpayers ultimately may have to bail out the agency. The FHA is "underpricing for the risk that they are taking on," says Thomas Lawler, a housing economist in Leesburg, Va., who formerly worked for Fannie Mae.

FHA officials counter that the FHA requires borrowers to document their ability to repay loans and has never needed a bailout for its single-family mortgage program. "The FHA is playing exactly the role it's supposed to play," maintaining the flow of mortgage credit, says Meg Burns, a senior official at the agency. "We need to be there as a backstop."...

The economic-stimulus bill passed by Congress and signed by President Bush last month raises the ceiling on the size of loans the FHA can insure to $729,750 in the highest-cost areas from a previous cap of $362,790. The new limits are due to expire at the end of this year. By then, however, Congress is likely to have enacted legislation that would permanently raise the loan limits, though perhaps by a lesser amount.

Yesterday, the Department of Housing and Urban Development, which runs the FHA, announced the new temporary loan ceilings in California. Details for the rest of the country are due to be announced this week, perhaps today. The California loan caps range from $271,050 in lower-cost areas such as Lassen and Trinity counties to $729,750 in high-cost counties in the Los Angeles and San Francisco areas.

Those upper limits also will apply to loans purchased or guaranteed by Fannie and Freddie, HUD officials said. Even in low-cost areas, Fannie and Freddie can handle loans of as much as $417,000...

The FHA could raise its insurance prices. For now, all borrowers with FHA-insured loans must pay an up-front fee for that insurance equaling 1.5% of the loan amount. Then they need to pay additional fees of 0.5% per year based on the outstanding loan balance. (If borrowers make payments for five years and the loan balance falls to 78% of the original value of the property, the annual fee is no longer due.)

The FHA also allows sellers to provide more sweeteners to buyers, such as by paying loan-closing costs, which can be crucial in a weak market. Such concessions on FHA-backed loans can be as much as 6% of the home's sale price; for low-down-payment loans backed by Fannie or Freddie, the maximum allowed for seller concessions is 3%

FHA Mortgage Limits in California by County

County Name	Median Home Price	FHA Limit
Alameda County	$995,000	$729,750
Alpine County	438,000	547,500
Amador County	355,000	443,750
Butte County	320,000	400,000
Calaveras County	370,000	462,500
Colusa County	318,000	397,500
Contra Costa County	995,000	729,750
Del Norte County	249,000	311,250
El Dorado County	464,000	580,000
Fresno County	305,000	381,250
Glenn County	230,000	287,500
Humboldt County	315,000	393,750
Imperial County	260,000	325,000
Inyo County	350,000	437,500
Kern County	295,000	368,750
Kings County	260,000	325,000
Lake County	321,000	401,250
Lassen County	200,000	271,050
Los Angeles County	710,000	729,750
Madera County	340,000	425,000
Marin County	995,000	729,750
Mariposa County	330,000	412,500
Mendocino County	410,000	512,500
Merced County	378,000	472,500
Modoc County	125,000	271,050
Mono County	370,000	462,500
Monterey County	599,000	729,750
Napa County	615,000	729,750
Nevada County	450,000	562,500
Orange County	710,000	729,750
Placer County	464,000	580,000
Plumas County	328,000	410,000
Riverside County	400,000	500,000
Sacramento County	464,000	580,000
San Benito County	790,000	729,750
San Bernardino County	400,000	500,000
San Diego County	558,000	697,500
San Francisco County	995,000	729,750
San Joaquin County	391,000	488,750
San Luis Obispo County	550,000	687,500
San Mateo County	995,000	729,750
Santa Barbara County	615,000	729,750
Santa Clara County	790,000	72,9750
Santa Cruz County	719,000	729,750
Shasta County	339,000	423,750
Sierra County	228,000	285,000
Siskiyou County	235,000	293,750
Solano County	446,000	557,500
Sonoma County	530,000	662,500
Stanislaus County	339,000	423,750
Sutter County	340,000	425,000
Tehama County	250,000	312,500
Trinity County	200,000	271,050
Tulare County	260,000	325,000
Tuolumne County	350,000	437,500
Ventura County	599,000	729,750
Yolo County	464,000	580,000
Yuba County	340,000	425,000