I first mentioned the new FHA Short Refinance program when it was announced earlier this year, but it seems worth recapping up again because the program officially starts up today. The new program is aimed at assisting those who are “underwater” on their mortgage (owe more on their mortgage than their home is worth). The goal of the program is to reduce a borrower’s principal balance in order to bring the value of the mortgage more in line with the value of the home. According to the FHA, 500,000 to 1.5 million borrowers could be eligible to receive assistance under the short refi program.
Mortgage rates have been hovering near record low points for several months now, but many borrowers have been unable to refinance and take advantage of the low rates because of reduced equity in their homes. According to Freddie Mac, the average mortgage rate on a 30 year fixed mortgage was 4.32 percent. This program would allow many people to save money by reducing monthly payments through refinancing.
From the FHA Mortgagee Letter, here are the conditions 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.
Under the initiative, lenders that are willing to work with borrowers in order to reduce principal amounts can refinance these mortgages into FHA mortgages that are insured by the federal government, essentially reducing the lender’s exposure to default in return for writing down the mortgage. Under this plan, there is some risk for taxpayers, who would be on the hook for any mortgage that defaults (according to Nick Timiraos at the Wall Street Journal, 20 percent of loans modified through the program could ultimately default. Mr. Timiraos has posted an excellent breakdown of the new program here).
Other attempts by the administration to alleviate the ongoing foreclosure problem have fallen short of the mark. Borrowers are falling out of The Home Affordable Modification Program (HAMP) in droves because they did not qualify for permanent modification for a wide variety of reasons.
Although there are signs the current foreclosure crisis may be ebbing, many worry that further declines in home values could cause a whole new wave of defaults. Demand for homes has decreased dramatically since the expiration of the first time homebuyer tax credit, and there is a massive overhang of housing supply on the market. These conditions, against the backdrop of reduced income due to high unemployment have made conditions ripe for further declines in home values. Many are estimating that home values have another 5 to 20 percent to fall before they bottom out. Just over 20 percent of borrowers are underwater on their mortgages.
Equally vexatious are home with second mortgages. In order to utilize the short refi program, second mortgages need to be lowered so the borrower’s combined loan to value ratio (CLTV) is less than 115 percent. Many banks hold billions of dollars in second mortgages on their asset sheets, and are hesitant to write them off even if they only have nominal value. When you add in issues that come with debt settlement and lien position, it can be nearly impossible to refinance underwater homes with second mortgages.
I would like to see this new program succeed, but ultimately I am dubious. To me, it appears this program has many of the same flaws that caused other loan modification efforts to fail. Do you think this program will work? Let me know in the comments section below.
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Kevin
September 7, 2010 @ 11:17 am
Michael:
Nice recap. I wanted to get some further thoughts on the idea that lenders will/will not have an incentive to participate. If they take the position that a currently performing loan should not be modified (with no further consideration of facts), I’d agree that lenders’ motivation to participate would be low.
However, if they consider the future liklihood of additional defaults, lower (secured asset) values and the eroding position that people feel compelled to repay debts (especially where the lending community as a whole contributed to the over-inflated asset prices), I think there would be some motivation to move these assets off their books. If a lender could move many qualifying (under-water) assets off their books, wouldn’t this give them a great opportunity to alleviate future losses and clean-up their loan books? This would provide them stronger lending ability, the opportunity to reduce temporary staff handling modifications and feel more confident about their business in future quarters. Sure there would be a lot to write-off, but many of this may get written-off with future defaults anyways.
What is the chance that lenders take this second posision as opposed to the first?
Thanks for your response.
-Kevin
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Michael Kraus Reply:
September 7th, 2010 at 11:54 am
Kevin, it is an interesting point you raise. I would imagine that at some point it would make sense for lenders to write down mortgages in order to clean up their books or to simply cut their losses.
The best evidence I can come up with that lenders may take this position would be this: in the last couple months, private mortgage modifications are outpacing government mortgage modifications by a fair margin:
Anecdotally, many commenters in this space have complained about the issues they have had getting lenders cooperation with mortgage write-downs or modifications. Anyone who has dealt with any sort of large bureaucracy knows how difficult it can be to deal with these kind of institutions, and I fear it could be the same with this short refi program.
When push comes to shove, I would think lenders would make whatever decision makes the most sense when it comes to their bottom line and future default risks, complications with second liens and securitization issues notwithstanding. With luck this program will be more successful than previous ones.
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John Kollar
September 7, 2010 @ 1:36 pm
Michael,
I called up the bank and their mortage representative had no idea what I was talking about. I referred them to documentation on the program and after checking the FHA/HUD link out they said this program hasn’t been enacted. When I took them down the list of qualifications, which I meet, the bank’s representative deflected and tried to take me down a different path. It was a shell game on the phone for about 15 minutes. Bottom Line: My bank (which is a HUGE one) either doesn’t know about this or is playing stupid because they don’t want to lose out.
I am wondering if there is route, as a mortgagee, which I have to help their hand into looking into my mortgage situation? My guess is that it is simply their choice, take it or leave it. I guess they are leaving it.
Thank you!
LCDR John Kollar
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Michael Kraus Reply:
September 7th, 2010 at 2:11 pm
John, your experience doesn’t surprise me, unfortunately, because it is similar to stories I have heard about other modification programs.
I do know that many mortgage companies are extremely backlogged when it comes to modifications, processing, etc. This program is all over the news today, so I doubt it is that your bank is totally unaware of it. Perhaps they are in the process of formulating a policy with regard to this program (with a huge bank, I would guess this would take some time).
I wish you luck, maybe in a few weeks your bank will have more information for you. I’m not sure what you as a borrower can do to make your bank move along any more quickly.
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Jillian Reply:
September 17th, 2010 at 4:16 pm
We have our mortgage with a LARGE bank who also “played dumb” in regards to this program. We meet every requirement and our home has lost 45% of it’s value since we purchased in in 2004. We are still paying on the original cost. We are in a position where we can afford our current payment, even though they are much higher than they should be for the current value of the home, and we need to move. Both of us are commuting 100+ miles a day due to our new jobs/schooling. Even though we can make our payments, I feel like we are going to need to short sell and rent for a few years to come out of this mess. Am I the only one that feels our large institutional bank is literally stealing from us?
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chris
September 7, 2010 @ 2:05 pm
In reading both comments, I do still see some mortgages that are still not addressed in this new round of “quick fixes”. That being said, what if you already have an FHA insured mortgage that you have already “streamline refi’d”? Even at a new 4.5% interest rate, you are still not touching the mortgage principal amount that is holding everything else in perspective of “underwater”. Unfortunately, I do see a lot of limiting conditions in any of these modification concepts that cannot be adapted to help all that need it.
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RM
September 7, 2010 @ 3:02 pm
How about just finding a way for the underwater mortgages to be refinanced at the new, lower rates? No principal reduction needed.
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Bethany Reply:
October 1st, 2010 at 2:02 pm
Exactly!!! That is all I want to do! Take advantage of the low rates like everybody else. But I can not do that unless I ruin my credit and miss three payments. I don’t care if they reduce my loan just reduce my rate!
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Beth
September 7, 2010 @ 3:04 pm
While I agree that this a great program for the borrower, I really see little incentive for the lenders to participate. If a loan is current, why change it? In their minds, don’t fix what isn’t broken.
While this program would be a Godsend for me and my situation, my loan servicer has made it quite clear to me that my loan, which is owned by Freddie Mac, will never be modified. Provident Funding has taken the stance, and I am quoting Eric in Refinance, “we did not take any TARP money so we are not participating in these programs”. They only minimally participate in HAMP, and that is due to the fact they have no choice in that.
What is a borrower to do? So many programs that can help, and no one willing to help. If only there was some way to require servicers and lenders to participate.
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Felipe Arias
September 7, 2010 @ 9:34 pm
This is great in theory. Just like HAMP. As long as you can get through all the hurdles and you qualify, it is great. It seems as if the gov’t is creating new programs to fit VERY specific types of loans. The problem is that the amount of variables tied to an applicant in order to satisfy Short-Refi guidelines will significantly reduce the amount of qualified borrowers. What about all unfortunate condo owners whose condominiums are no longer FHA approved? or those who bought homes w/ non-comforming rooms? or those who’s property values dropped over 30%. They don’t stand a chance.
In retrospect, I like condition #12
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.
I would certainly encourage those fortunate home owners who are enjoying their permament mods to perhaps “double dip” and attempt a short-refi with their already modified loan.
The more tools the better for everyone. Let’s just hope the lenders do cooperate with these new programs.
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curmudgeonman
September 8, 2010 @ 1:10 pm
I just checked BofA’s website. They said nothing on the FHA principal reduction refinance except imply it is pending and that could be forever given BofA’s history. So I will put in for a short sale tonight. Out of $260K mortgage approximately $160K is unsecured. Will cancel the earthquake insurance since nobody will ever pay the deductible if the house gets destroyed. Should save me some money. I won’t play the mortgage mod game with these folks, as they as have demonstrated they do not deal in good faith. I will just assume they would rather foreclose or short sale than reduce principal, even though they purchased for way under book value from countrywide.
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Raj
September 14, 2010 @ 5:12 pm
I called my bank and they said they are not participating in this program. As the participation by the vendors is voluntary i don’t think any bank will participate. I am looking for a refinance for my underwater mortgage. All of the owners who failed to pay the mortgage are getting incentives in the form or loan modification or refinance, why not we.
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Owner Underwater
September 17, 2010 @ 1:56 pm
I called my lender (Indymac) and they claim not to know about the program. I called FHA to try to obtain a list of lenders participating in the program. I was referred to their list of FHA approved Lenders on the WEB which according to FHA will help me negotiate with my lender.
I called three different FHA lenders and they all made out some excuse on why they could not help me.
This program does not sound very promising……
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Bethany
October 1, 2010 @ 1:56 pm
Do you know how this FHA Short Refinance effects your credit? Is the 10% reduction on your mortgage concidered a charge off on your credit?
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upside_down
October 1, 2010 @ 3:32 pm
I meet all of the qualifications for the SRP and called CitiMortgage. They didn’t know about the program at first. I was put on hold for a minute and the lender told me they weren’t participating. I’m very disappointed.
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Sheryel Aschfort
January 20, 2011 @ 9:18 pm
Do you have to go thru your own bank or is there a mortgage company or negotiator that can go to bat for this loan?Seems like your bank will always push you away if this loan is current. I have a 400,00 loan on a home now worth 200,000
I have had 2 mods and still find it difficult to pay,I know I can’t do it for long..What next if I can’t pay I can’t get this loan..Who has gotten this loan? Anyone?
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lisa
February 28, 2011 @ 10:18 am
My current mortgage is with Saxon (loan has been sold 5 times) after 8 months of trying this and that and a modification I finally spoke with loss mitigation and a fine young man who promised to help me. I recevied a letter in the mail from my mortgage company stating that they will take 73,000 on a short payoff and will consider it paided in full. I owe 231,000. He told me that with this letter I will be able to get a re-fi, which I was not able to do prior. Sounds like an amzaing deal doesnt it….I have yet to find a bank that will re-fi me. FHA px that I called said yes we are FHA approved but we dont do short re-fi. This gentleman told me dont stop, keep calling around and you will find someone with FHA short refi. I meet all the requirments of the FHA Short refi. I am not giving up yet. I have until March 15th to make this work. I have to say you really have to be persistant and you will finally get someone who may give you a little home on this housing crisis. I fear that there are only a few that will short re-fi.
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