FHA plugs higher loan cap for troubled borrowers

WASHINGTON, June 19 (Reuters) - Hundreds of thousands of troubled borrowers will soon receive a letter urging them to refinance their mortgages through a U.S. government program that will insure costly homes.

The Federal Housing Administration may guarantee home loans as large as $729,750 through the end of the year under an economic stimulus bill. That loan level is more than double the old FHA loan size cap of $362,790.

The new letter program will reach borrowers who may soon see their interest rate spike and may be eligible for the new loan size amount. In all, 675,000 families who may qualify for the new loan limit will be alerted to the FHA program, said the Department of Housing and Urban Development, which administers the FHA.

"This letter might be the most important piece of mail many of these families will receive all year," HUD Secretary Steve Preston said in a statement on Thursday. "This information could not only help save their current home, it could help provide them with long-term financial security."

While the $729,750 loan limit will expire at the end of the year, legislation before Congress would permanently raise that loan size. A proposal being debated on Thursday by the Senate would set the FHA loan level to about $625,000 in some high-cost regions.

The Federal Housing Administration is a Depression-era program that insures a borrower's monthly mortgage payments and so helps him win more favorable loan terms. The program was conceived to help low-income borrowers but policy-makers have lately focused on its potential to help today's troubled borrowers who are at risk of losing their home.

During the height of the recent housing boom, many borrowers turned away from FHA loans and toward the less-cumbersome terms of subprime mortgages available to borrowers with shaky credit. Recently, though, many subprime borrowers have turned to FHA for their reliable terms.

The FHA said it received an average 8,543 applications daily in the last half of May, nearly triple the same period a year earlier. In total, the FHA received 1.17 million applications in the year through May 31, up 158 percent from the same period in 2007. (Reporting by Patrick Rucker, Additional reporting by Al Yoon in New York; Editing by Andrea Ricci)