Back in September 2010, I wrote a blog about the FHA Short Refi program, specifically about the lack of lender participation in the program. It has been one of the most read and most commented on blogs that I’ve written. Recently a reader requested a follow up to this piece. Unfortunately, it doesn’t appear that the program has performed any better since I wrote the first post.
First a little background on the program. Generally, speaking homeowners who owe more on their mortgages than their home is worth are unable to refinance their mortgage because lenders are hesitant to underwrite a new mortgage on a home that is underwater. This is prudent on the part of the lender, as negative equity tends to be a leading indicator of eventual default.
However, negative equity had never before been such a pervasive problem. Currently property values are down by about a third on average since the housing market peaked in late 2006. Eleven million Americans are underwater on their mortgages, which accounts for about a quarter of the mortgaged homes in the country (there is about $750 billion in negative equity in the U.S. housing market). Many of these borrowers have mortgages from the mid-2000s with rates significantly higher than they are now. In order to help these borrowers refinance, the FHA short refi program was introduced.
In order to qualify, a borrower had to be current on their payments, have a loan that is not an FHA loan, and have a participating lender. The problem was that not many lenders participated, as participation was totally mandatory. The Short Refi program generally required lenders to take a loss, because one of the stipulations of the program was that the new loan couldn’t have a loan-to-value ratio greater than 97.75%.
Let’s say for instance that someone purchased a home for $500,000 and put down 10%, so the original mortgage was for $450,000. Subsequently the value of the home dropped by 1/3 to $333,500. Under the FHA Short Refi program, the new mortgage could be a maximum of $325,996. Even if we were to assume that it took a couple of years for the home value to drop, and the borrower consistently made payments and paid off some of the mortgage, the lender would take a large loss on this loan. This does not even factor in that securitization and second liens could make it even more difficult or impossible to modify a mortgage. So it is easy to understand why lenders did not participate.
One could of course argue that doing a short refinance would cut lender losses, because the loss involved in a short refi is almost certainly less than would be lost if the home went into foreclosure. However, those who would attempt to do an FHA Short Refi would also have to be current on their mortgage – which makes it seem less likely that this subset of borrowers would eventually default. From the lender perspective, somebody who is trapped in a mortgage they cannot refinance, with an interest rate far above market, that continues to make their payments is an ideal customer. It would probably make far more sense to attempt to mitigate losses with homeowners who were not making their payments (these are the people far more likely to end up in default).
As near as I can tell, the FHA Short Refi program, which is scheduled to expire at the end of this year, is still suffering from a lack of participation. According to HUD’s figures, 334 short refinances were completed in the 2011 fiscal year. This number is trending up, and as of the most recent data, 313 short refis were completed so far in the first quarter of 2012. Despite the increase in refinancing, the program was intended to be an $8 billion program, and will likely only use a small fraction of its budget.
Although there has been some talk of a broad-based refinancing plan that would help underwater homeowners refinance through the FHA, nothing concrete has been developed. Additionally, the updated Home Affordable Refinance Program (HARP) is scheduled to get underway in the coming months. HARP 2.0 is also supposed to help underwater homeowners refinance their loans. The first iteration of HARP met with a modicum of success. It isn’t entirely clear how much impact HARP 2.0 will have (although many seem optimistic).
So at the end of the day, the FHA Short Refi program appears to be a bust, and will likely remain so unless major changes are made to it (specifically, lenders would have to be heavily incentivized to participate in the program).
If you’d had success with an FHA short refi, I’d like to know about it. Let me know in the comments below.
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CAS
February 29, 2012 @ 3:42 pm
I think most of the lack of participation is due to ed demarco’s quasi religious beliefs that principal reductions wont work, therefore not allowing fannie and freddie to participate in this program. Pretty hilarious that f&f can buy up loans without the homeowners consent and then hold them hostage and not allow them to participate in treasury dept approved programs. While there at it I wouldn’t be surprised if f&f found a way to bet against homeowners being able to do a refi..oh wait, they did. Lets hear it for fraud and screwing the middle class!
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Chris
February 29, 2012 @ 6:21 pm
I’m in the position of underwater by a margin slightly higher than the original 125% LTV ratio (currently 135%). I would love to participate in the HARP 2.0 program once they lift the LTV caps. My current lender (Citizens, owned by Royal Bank of Scotland) is not one of the big 4 so they do not know if they will even be participating in this program.
A few days ago, I went to my bankers at Chase to see if they would take on a loan under this program and I was denied because I did not have my mortgage through them initially. The program was only available if I already had my mortgage with them.
It’s too much risk for a new lender give me a new mortgage and my current lender isn’t participating in the program so I have to wait.
I understand having to weed out the good borrowers from the bad but many homes have lost up to half the value in the past 3 years, thus eliminating them from any kind of relief.
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Jon Reply:
May 2nd, 2012 at 9:51 pm
Hey Chris,
I can help you! Many banks have made the decision not to participate unless they originated the mortgage initially, because it serves their purposes. That said, they whole purpose of the program was to allow anyone with a fannie/freddie loan to refinance at any LTV with any lender. There are lenders doing just that, and we are one of them. We can refinance your loan as long as it is owned by fannie or freddie (and other minor qualifications are met…on time payments, reasonable credit score, etc). Write me back…I’m happy to help, or point you so someone who can in your area.
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Mike
March 2, 2012 @ 4:47 pm
I have 2 homes, both mortgages are bank portfolio mortgages so neither is Fannie or Freddie. Still left out in the cold with HARP 2.0.
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Carole
March 5, 2012 @ 9:06 am
what banks are participating in the FHA Short Refi program ? And why is it called the FHA Short refi if FHA loans are not eligible?
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Eric Reply:
March 7th, 2012 at 9:34 am
I’d like to know which banks are participating and how to get the ball started as well. I think that I qualify if I can find an institution that would do it. Currently my mortgage is held by Citi, but I think it’s Citimortgage and not Citigroup.
From what I’ve seen, if you have an FHA loan already you need to look at the FHA Streamlined refinance. That seems to be the way to go, and also seems to be easier.
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Melissa
March 21, 2012 @ 12:15 pm
Why are all the loan modifications/refinances that have come along with these bills only looking to help loans backed by Fannie or Freddie? Just because I have an FHA loan 1st mortgage makes me ineligible for relief. My house’s value has dropped just like everybody elses. Tried to do a traditional refinance combining our 1st and 2nd mortgage at the new rates, was supposed to save us hundreds a month, but the house appraisal came in to low. Where is our help????
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John Reply:
April 25th, 2012 at 12:10 am
If your FHA loan was originated prior to June of 2009, you may be eligible to take advantage of some good savings on your 1st mortgage payment starting 6/12/2012, while subordinating the 2nd mortgage (leaving it the same). This does not require an appraisal and all of your closing costs would be paid from a lender credit. The majority of the refinances I do are FHA Streamlined Refinances with no appraisal and no closing costs. If you are in Washington, Oregon or California, I’d be happy to put numbers in front of you and see if it makes sense.
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Mike
March 26, 2012 @ 6:01 pm
Has anyone had any luck with Citimortgage and the FHA Short Refi? If so, please share. On paper, I qualify for this refinance option, but Citimortgage refuses to adjust my rate.
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Shelly
April 29, 2012 @ 9:48 am
I am one of the many homeowners that are left out in the cold by HARP 2.0 and the FHA short refinance (SunTrust does not participate in the program). My loans are both interest only are portfolio products. The home is underwater by at least 125% and we are running out of options and time. Is there help for families like mine and if so what?
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