The FHA's Benign New Role in Treasury's HAMP

One aspect of Friday's announcement about changes with the Treasury's mortgage modification program (HAMP) involves the Federal Housing Authority (FHA). Some critics, including me, worried that getting the FHA involved could prove dangerous. Would taxpayers now be on the hook to guarantee any mortgage modified to prevent foreclosure? Luckily, it appears not. At least, not yet.

Here was my worry from Thursday night, when the broad strokes of Friday's announcement leaked:

The Post also says that the Federal Housing Administration (FHA) will be involved. I'm a little unclear why. It could be that the Treasury hopes to encourage lenders to take part in these new initiatives by slapping a government guarantee on the modified mortgages through the FHA.

That, of course, would likely lead to very high losses for the FHA as these mortgages re-defaults. It would essentially act as a giant transfer payment from taxpayers to banks.

Luckily, that's not what's happening here, despite what those worried about the FHA's new involvement might think. In fact, all that has changed is that troubled FHA-backed loans will now be eligible for HAMP modifications. Of course, this won't cost taxpayers any more than foreclosure would have. Indeed, it may cost less, if the modifications work.

The fact sheet (.pdf) is pretty clear on this. But a Treasury spokesperson also confirmed my interpretation yesterday saying:

The only change on this front is that HAMP has been expanding to include homeowners with FHA loans. So TARP funded incentives will now be available to borrowers and servicers whose loans are modified under the FHA-HAMP guidelines. These will continue to be FHA insured.

This does not open up FHA guarantees to newly modified loans under HAMP that are held by banks. That would be far more costly to taxpayers. If this changes, I'll be among the first to criticize it.

But as of now, this change seems pretty benign at worst and quite smart at best. Frankly, I'm a little surprised FHA loans wouldn't have been HAMP eligible in the first place. I don't really see any reason why they would have been excluded from the program. It makes sense to want to minimize the loss to taxpayers on FHA loans, an end HAMP can help to accomplish.