On Friday, FHA commissioner David Stevens announced a new FHA program which should be available in the next few months to help homeowners who are underwater on their home to refinance into a new FHA insured mortgage. FHA announced up to $14 billion in TARP funds will be available for this program although the consensus is they will not need anywhere close to this amount.
FHA will allow a borrower who owes more than their home is worth to qualify for a new FHA insured mortgage up to 97.75 percent LTV (loan to value ratio which is the loan amount divided by the home value) and up to a 115 percent CLTV (combined loan to value which is the sum of all mortgages associated with the property divided by the value of the home.
FHA will allow borrowers to qualify for this program with out any increased mortgage insurance even if the risk may be greater for these loans. FHA will also allow borrowers to qualify based on FHA mortgage rates.
In order for a home owner to be eligible FHA will require:
- Borrower must currently reside in the house as their primary residence
- Full income documentation required
- Must qualify according to current FHA guidelines
- Current on their current loan AND
- Their current mortgage servicer of either their current first lien or 2nd lien MUST reduce the principle amount owed by a minimum of 10 perecent (no guidance yet on whether any additional liens will be included or allowed)
- Housing DTI (total housing payment for all liens of principle, interest taxes and insurance HOA dues etc divided by total gross monthly income) of 31 perecent
- Total DTI (all monthly debts divided by total monthly income) of 50 percent. FHA did announce DTI greater than this may be allowed for borrowers with exceptionally strong credit histories.
- Current mortgage may not be a FHA mortgage
In my opinion, the main concerns for this program are going to be that “every loan approved MUST have a minimum 10% reduction of principle balance of their current mortgage”. I am not sure how many current mortgage servicers will participate in light of this criteria of reducing what the borrower currently owes them by 10 percent debt forgiveness.
Another aspect of this program which the letter from the FHA commissioner doesn’t mention is since max LTV is 97.75, if a borrower now owes more than their house is worth, the current mortgage servicer must “reduce the current mortgage balance to 97.75 percent of the current appraised value or the current servicer MUST offer a 2nd mortgage for any balance above 97.75 percent up to a maximum of 115 percent.” A lot of current servicer’s are NOT in the 2nd mortgage business so I am not too confident this may be an option or how this aspect may be structured.
What do you think? Will the new $14 billion FHA program do it’s job and help struggling home owners, or will it be a flop like it’s HAMP predecessor?
In the past, concerning the federal government’s HARP or HAMP programs, even though certain agencies (Fannie Mae, Freddie Mac or FHA) may allow specific expanded criteria’s for qualification purpose, to say it has been a challenge to find investors willing to also allow the specific program(s) guidelines would be a gross understatement. The same will hold true for this new program. It is going to be very challenging to find lenders who will also allow and follow FHA’s guidance.
There will also be quite a bit of creative structuring required including: the current servicer modifying the current balance of the underwater first mortgage to 97.75 perecent and then subordinating the difference.
If they entertain this option then they will also have to determine if the rate and term will be different than the current note. This is called a modification/subordination agreement which will also be very time consuming getting this executed. The current mortgage amount will have to be reduced to the amount needed to satisfy the difference between the 97.75 LTV and 115 percent cltv
Example (expanding on the example in FHA commissioner’s letter)
| Current value of home: |
$180,000 |
| Current owed on mortgage |
$240,000 |
| Max combined allowed CLTV: |
115% |
| Max allowed LTV: |
97.75% |
| Max combined loan amounts for new 1st and 2nd: |
207,000 |
| Max amount allowed of new 1st: |
$175,950 |
| Max amount allowed of new 2nd: |
$31,050 |
This means the current servicer will have to forgive or write down the current mortgage from approximately $200,000 to $207,000 to also include closing costs unless the borrower pays out of pocket for the difference. Let say to $207,000 for argument sake.
They will have to modify the current first mortgage to $31,050 (along with possibly modifying the interest rate, and term back to 30 yrs) after doing the modification part, then will have to subordinate the current modified first mortgage into a second lien position, in order for the new FHA insured first mortgage to be in first lien position.
- A second or third possible option to the above example may be too (if allowed which has not been addressed yet as far as I am aware)
- Reduce the current balance by the mandatory 10 percent or by $24,000 to $216,000 AND
- offer the borrower a unsecured loan of $9,000 in order to get down to the 115 percent max allowed FHA CLTV for this program offer the borrower a unsecured loan of $40,050 therefore the required 97.75 percent maximum allowed 97.75 percent LTV can be obtained.
Any combination of the above are possible options. Although, they may be possible options it is too early to determine how probably if any of the above options may be.
The intent of this new program is very noble, it is the execution which I have serious doubts on the availability. Read FHA Commissioner David Stevens’ letter in its entirety.
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