February 29, 2012 by 27 Comments

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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  • sprinkit@yahoo.com' CAS says:

    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!

  • csonjeow@gmail.com' Chris says:

    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.

  • mkraus@muihomeloans.com' Mike says:

    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.

  • carole@bcryan.com' Carole says:

    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?

  • eric.sligar@mcckc.edu' Eric says:

    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.

  • ravenwolf6201@yahoo.com' Melissa says:

    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????

  • mchuthakieo@gmail.com' Mike says:

    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.

  • john.sarausad@gmail.com' John says:

    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.

  • shelly.sisson@gmail.com' Shelly says:

    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?

  • jgedde@catalystlending.net' Jon says:

    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.

  • lauriepatrick@cox.net' Laurie says:

    I have a mortgage through US Bank with an interest rate of 9.65%. I am also upside down in the mortgage. The house in Omaha NE is probably worth 90,000 and I owe $114,000. I know this seems minor compared to some, but I don’t have $20,000+ to pay this down. I can afford the payments right now, but the principle is going nowhere. I would like to be able to move from this house, but don’t think I ever will be able to. US Bank agreed to refinance the entire amount for 7% because I owe more than it is worth. I have always made my mortgage payments timely. Where are the 3-4% loans for people in my situation? How can I reduce the principle? I’m sure they have made more than enough on me already, that they should be able to reduce the principle to a reasonable amount.

  • boffi3@verizon.net' regina says:

    I am in the same boat as you. We have a mortgage with US bank.. we are upside down.. value.. around 200,000.. loan is at 270,000…………….. They make it seem like it is next to impossible to refinance… or they just transfer you to voicemails of people who are never there… very frustrating…UUUUUUrrrrrggggggggggg

  • wright.corey@gmail.com' Corey says:

    Has anyone used 1st Alliance??? They are working with me on this program and they have gone so far as to send me all the initial documents. I’m trying to confirm if they are a credible lender and also discuss the terms on the documents with some folks.

  • tv_shah@yahoo.com' Tejas says:

    Hi Corey,

    I am thinking of contacting 1st alliance. Were you able to refinance with 1st alliance? How was your experience?


  • conycat@prodigy.net' Angelica says:

    Hi, I’m looking for the name of banks who are willing to do FHA Short Refinance, can anyone give me this information please? I’ve been on the FHA govt. web page where there is a supposed list but when I click on it to print it, it won’t print, nothing happens. Can anyone help?

  • Ambur.quijada@gmail.com' Ambur says:

    We are currently trying to do a short refi with First Alliance. The service rep is horrible and they are trying to pressure us signing the documents but she isn’t able to answer all of my questions. her default answer is “‘just sign the papers that we sent you and send them back, it’s not committing you to anything.” When I spoke to my mortgage company that stated that they are salespeople and they work on commission. I am not impressed but I don’t know anyone else that will do this program.

  • daniel_grunauer@Yahoo.com' Peter says:

    I just closed my loan through Fay Financial. They are wonderful to deal with. The process takes about 60 days but definately well worth my time.

  • shoare@pyramidmold.com' Steve says:

    I had a meeting with Bank of America today (11-26-2012)for the FHA Short re-finance. “My current loan is with BofA”
    After answering their initial questions regarding being eligible I apparently passed. They are now sending me the loan packet to fill out. Has anyone out there had any luck with Bank of America on the FHA Short Re-finance, am I wasting my time or is there hope.

  • norahmis@yahoo.com' autum says:

    I contacted them and was told that they do not want to deal with NH Housing or Dovenmuelhe customers.

  • norahmis@yahoo.com' autum says:

    I checked Fay Financial out but no where does it mention that they participate in FHA Short Refinance.

  • chriscarmona@gmail.com' Chris says:

    How’d your Short Refi go with BoA? Waste of time?

  • ekwisdom@netzero.net' Kristi says:

    Hi Does anyone know if the FHA short refi program expired in 2012? We have Wells Fargo and owe 330K houses in our area are going for 180K and Wells Fargo not willing to help..Thanks

  • mcclain325@gmail.com' CAROLYN says:

    Does bank of america have this program,

  • Freedom7530@gmail.com' Patrice says:

    What is the status with your SHORT refi with BOA???

  • dawn.levandusky@gmail.com' Dawn says:

    I’m also wondering how the short re-fi went. We are having a miserable time finding anyone that has any knowledge of this.

  • Gthompson@mccolly.com' G says:

    I was able to use 1st alliance for this refi in 2012. They were and are so very rude! They “hid” an appraisal on my home showing I had more then 20% equity so I had to go FHA and pay pmi. They call and email every month about the payment. I make it online before the 16th and have to tell them that every month. I want to get rid of this pmi I should have never had to pay. The interest rate is all at least 2% higher

  • tomcorsi@yahoo.com' Tom C says:

    OCWEN is my mortgage servicer & I am trying to do a short refi with 1st Alliance who has approved me but says I need to send $8000 to OCWEN which represents shortages in proceeds. They want me to send this money to OCWEN with no guarantee but have told me if I send the shortage in the proceeds the deal will go through. Has anyone else ever done this. It sound like I will be sending money and taking a chance on losing it.

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