Starting September 7th there will be more refinancing options for underwater borrowers. I briefly mentioned the new (Federal Housing Administration) FHA short refinance program last week, but now we have an official mortgagee letter from the FHA that details the new program.
According to Deutsche Bank, there may be as many as 20 million underwater homeowners by the end of 2011 (these figures assume a decline in home prices of about 10 percent). Underwater homeowners are at much greater risk of foreclosure, of either the strategic or traditional variety.
From the letter, here are the conditions for qualification for the new program:
1. The homeowner must be in a negative equity position;
2. The homeowner must be current on the existing mortgage to be refinanced;
3. The homeowner must occupy the subject property (1-4 units) as their primary residence;
4. The homeowner must qualify for the new loan under standard FHA underwriting
requirements and possess a “FICO based” decision credit score greater than or equal to 500;
5. The existing loan to be refinanced must not be a FHA-insured loan;
6. The existing first lien holder must write off at least 10 percent of the unpaid principal balance
7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;
8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;
9. For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner’s total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;
10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;
11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and
12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification as described below.
What is not entirely clear to me from the letter is what incentive lenders have to participate in this program. It is not compulsory and the only real advantage that I can see for lenders would be that it may be more cost-effective to write down a loan than to deal with foreclosure. If this is the case, however, one would think that lenders would be doing this right now, without any prompting from the government. I was under the impression that one of the main hurdles to refinancing (other than being underwater) is second lien holders. I don’t see that this program addresses that anywhere.
Am I missing some nuance to this program? What will make this any more successful than HARP? If you have some insight, let me know in the comments section below.
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Bonnie Hart
August 9, 2010 @ 2:33 pm
Sounds good at first but what banks are going to agreed on the 10%? Our government is really trying but most homeowners are under water more than 10%. Nice try.
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Jim Reply:
September 7th, 2010 at 7:02 pm
10% is the minimum, not the maximum. But I agree, I don’t see banks reducing the loan by 10% let alone more unless they have some incentive to do so. Currently, the way things work is that unless you are behind on your payments you are not a risk to them… why would they give you free money when you are not considered a risk? To get them to even talk to you it seems you have to show them are are ready to strategiclly default… which basically means you stop giving them any money.
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Sharon Butler
August 9, 2010 @ 2:47 pm
So crazy, it would be great if some one would “think” about these programs and do the numbers! First of all what is going to push the current lenders to drop the balance by 10%? Second, 10% does not even help most home owners if FHA is only going to allow 97% LTV! Example: Home owner has a loan at $569,000 and the property is now worth $460,00. The current lender agrees to drop 10%, $56,900 which brings the loan amount to $512,100 which is 111% LTV and the max LTV on the program is 97%…so this home owner is out of luck! This program is a joke because honesly, a current home owner can do it without this program IF they are at 97% LTV and are in a single family home or an approved FHA Condo/pud. So, what is the big, great news? When is the government really going to do something. Back in the 1980′s there were streamline loans WHICH DID NOT HURT THE ECONOMY! Worked like this…a home owner can refinance their home, if they are current in the last 12 months and are not taking cash out. Simple? Think about it, As long as a home owner is not taking someone off title and not taking cash out and REDUCING their house payment, there was no qualifying. HOW HARD IS THAT? Reasoning is look the same people are paying the house payment and the rate and motnhly payment went down, so they afford the house payment!
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Bill Reply:
August 11th, 2010 at 2:21 pm
Sharon,
The 97% LTV only applies to the FHA-refinanced loan. A lot of underwater homeowners have two loans (80/20 era). For combined loans, the LTV is 115%
Bill
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Tam Reply:
August 11th, 2010 at 10:03 pm
I think that this program is a step in the right direction, of course the banks will have to cooperate. The incentive for the bank is that they will get 25-45 cents on the dollar for each loan they decrease. They will also will not get a negative credit rating for writing off these loans. Sharon the govt can only do so much. Blame the fricking banks..
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Jim Reply:
September 7th, 2010 at 6:27 pm
The 10% was a “minimum” … not maximum. Presumably the assumption is that the origional lender would be required to reduce the loan value until it hit the 97%. But, the question remains… what will make the banks actually do this?
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Khari Nixon Reply:
September 9th, 2010 at 3:33 pm
Sharon,
I see what you mean but understand that this for conventional loans under the FHA max limit. (FHA max loan is 271,050 in most areas)Unfortunately due to “credit scoring” (and dont get me started on that) some people cannot refinance because mortgage insurance will not cover it. Due to the market they may be at 100-105%. If their existing lender dropped it 10% they would be in range for the FHA program. Even more helpful if they had a 2nd lien as well.
Not every scenario fits thats for sure. But like “Home Affordable” programs (HARP TARP) its only going to be as good as the lenders want it to be.
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Mike Reply:
September 22nd, 2010 at 3:23 pm
Does this program come under the FHA loan limits? 270K for most areas…
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Real Property Check Reply:
September 13th, 2010 at 8:19 pm
Sharon, I happen to agree with you and Michael. I couldn’t have said it better myself. This program is a joke (only no one is laughing).
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What is not entirely clear to me from the letter is what incentive lenders have to participate in this program.
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Homeowners jump through hoops to no end only to find out they didn’t qualify because of some mindless piece of regulation which is no good to anyone.
Some of these things border on scams.
There is definitely too much red tape for too little of a result. And time is running out.
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Yvonne Reply:
September 30th, 2010 at 10:22 am
I’m a mortgage broker/broker-realtor..and these programs are all a joke. I tell everyone…”if the government really wanted to help existing homeowner’s they would create a streamlined program that would allow existing homeowner’s that owe more than property is worth to refinance as long as they are employed. A streamlined program period to refinance into a lower interest rate, longer term a real solution. Our administration is only approving programs that sound good. If the public really knew how much inventory of homes have yet to be released by the banks…we would have a coup. The banks have so many foreclosed homes that they don’t even have them listed..because the banks are all over staffed as it is…with employees who are all reading from a scripted scenario when one calls-in for a modification. It’s a disaster. Contact your local representative…complain. It’s going to get worse…” —- Yvonne S. / Ft. Lauderdale, Florida.
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Trina Reply:
September 30th, 2010 at 4:11 pm
We purchased a home 4 years ago for 900K, we put a large down payment and had a loan for 719K. Last fall we had intended to refi to a conv loan. Our state max is 567K, so we paid down another 125K with the intent of taking out a fixed 3o year at 567K and bal of approx 30 on a second. Only to find out that our values in this area had fallen, per the appraisers by 30%. They now say that our house is worth 640K, so we could not qualify as they are not willing to loan to those who are current and have good credit any more than a 80%ltv. So I attempeted to do the right thing and it bit me in the ass. Had I not paid down the loan to qualify I would now be very backwards and could qualify for this type of loan, but I am sure my bank would not have forgiven 10% of my loan and I am sure it would have made a negative impact on my credit had they done so. Why can’t the government just allow me to refinance my existing mortgage into a 30 year fixed and get the rate everyone else that is negative, backwards, behind … They are forcing those who are in good standings, out of their own homes. I do not get it
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WB Reply:
October 20th, 2010 at 8:42 am
Why wouldn’t they refi you again”?
john
August 9, 2010 @ 3:13 pm
I just saw this on my profile. This is an excellent feature and gives appreciation to all the hubbers who have done some good work at hubpages. Thanks a lot for starting this.
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steve in fairfax va
August 9, 2010 @ 9:10 pm
I am currently in the middle of an underwater refi through HARP (very difficult and expen$sive), and I stopped the whole process when I started to read about this Friday. After passing along the press release from FHA to my lender and talking to them, he all but laughed in my face when I asked if the bank would reduce the principle 10%. A snicker (of disbelief, not really disrespect towards me personally) was followed by “there is NO WAY Su*tru*t will write down the loan 10%”.
I qualify in every single way for this program (underwater non FHA conventional loan, both 1st and 2nd liens through the same bank, by FICO is 815, income qualifies, etc.) but the banks LAUGHED at this proposal.
Are there incentives FHA is not telling anyone about?
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Michael Kraus Reply:
August 10th, 2010 at 8:50 am
Steve I had the same exact question. I guess the rationale is that banks would rather write down mortgages than pay the cost of going through foreclosure.
However, if that were the case, you would think the banks would be doing it without prompting from a program like this.
I cannot figure out what the incentive for the lenders is with this program. Hopefully someone can enlighten me.
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David Donaldson Reply:
August 25th, 2010 at 4:16 pm
Steve, did you get anywhere with your bank on this? I have the same bank and I was going to talk to them about this but I’m curious if I should even talk to them?
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Matt Jones
August 10, 2010 @ 11:39 am
They have to write it down a minimum of 10%. They can write it down 50% if they choose. Bottom line it has to get to 97.75% of market value. The advantage to the program is that all risk is removed forever. Loan comes off lenders books. Protects agaisnt foreclosure in the future when market values are lower and protects against cost of foreclosure and the lender actually owning the property. Some lenders will look at this as the better of 2 evils.
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Bill Reply:
August 11th, 2010 at 2:24 pm
Not quite right – they have to reduce the mortgage by 10%.
The resulting mortage must be 97.75% or lower.
At that point, the total loans that the borrow holds cannot exceed 115%. So you can still have a second mortgage.
If I were to qualify, I’d likely have to pay down ~20,000 on my second. But it would be worth it if the bank was writing down 50,000 on my first and I received a lower rate.
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Anthony Dominguez
August 10, 2010 @ 10:04 pm
Can this be done without a 10% write down? I ask because all we’re looking for is a better rate on our existing principal, which is a lot more than what our house is worth. Writing down the principal would be great, but refinancing my existing principal and taking advantage of current low rates is all I’m asking for. Is this possible?
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Todd in CA
August 23, 2010 @ 4:05 pm
Several Issues
1) you have to be late or behind for banks to talk with you (1st hand experience) and then you fail the qualifications for the program
2) the banks make money on foreclosure because the hedge/mutual funds that bought up the mortgage backed securities actually paid/funded our mortgages once paperwork was signed so the big banks became essentially another escrow office.
3) there is nothing that says a lender must do anything but perform per the contract
4) the banks at the end of the day don’t care and still make money because we bailed them out.
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CAS
August 27, 2010 @ 2:53 pm
I read about this program back in march when a lot of hamp “enhancements” were announced. I think the government pays the bank .10 on the dollar to the bank for the amount that makes the ltv over 150% then something like .15 cents on the dollar for ltv 120%-150% and finally .25 cents on the dollar for ltv 97%-120%. I remember reading it but it was buried deep in some hamp docs. Also the second to last sentence on the “hud letter” about this program says “they anticipate this program will only help 500,000 to 1.5 million people.” That won’t even fix CA so I’m pretty sure this toothless program is unfortunately going to be another epic failure.
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Jennifer
September 6, 2010 @ 4:04 pm
The only leverage that a borrower may have with the bank is if they don’t have any PMI. I’m 15% under with only one lien holder and no PMI. The bank has more to lose than I do.
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Miamian
September 7, 2010 @ 5:02 pm
I buy property at the courthouse steps (now online) here in Miami. Most banks are not writing down the loans EVEN at a foreclosure sale. My guess is that the MI (mortgage insurance) only pays if property fails to sell at a foreclosure sale. Then lenders get 80% of loan value or judgement value. This is a great incentive not to discount any loan EVER.
Why should a bank discount anything when they can get 80% or higher of (artificially inflated with junk fees: BPO’s, inspections, property preservation, lock changes, winterizing (yes even here in Miami)) judgement by taking the property to foreclosure sale?
Your thoughts are welcome…
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Blorg
September 9, 2010 @ 2:08 pm
Supposedly the incentive for the lending institution is that they get 90% of the outstanding loan paid to them immediately so that they can use the money now.
I called my lien holder (ING Direct), and asked about this program. I was told that “they do not participate in federal programs.” I figure that I’ll wait a few weeks and try them again. It makes you wonder what good this program is when it is voluntary on the part of the lien holder.
The banks sure were willing to participate in federal programs when it came to being bailed out. While ING is a Dutch company, they still took bailout money from the Dutch government. Where is the reciprocity for the homeowners and tax payers that funded these bailouts?
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doyle glass
September 15, 2010 @ 1:06 pm
Are there any honest, legitimate companies doing a conventional version? I assume the orginating lender has to negotiate the payoff withn the old lender?
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Jen
October 1, 2010 @ 4:15 pm
Just spoke with ING direct and they told me and I quote ” Why would we want to write off at least 10% of your mortgage when you have been current on your payments”…I explained to them that I could quit paying my mortgage all together and they would lose the $340K I owe them or they could write off a minimum of $34K — the person on the phone was completely rude and told me that my credit would be ruined and that is a personal choice. I am so frustrated by this whole situation. I have been responsible and worked hard my entire life to get where I am at. I am trying to be proactive and for once just maybe once I was hopeful that a program would work for me….No DICE!!
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