Banks Could Tank New FHA Refinancing Program

Written by: Steve Cook   Thu, September 2, 2010 Beyond Today’s News, Crisis Watch

A new FHA program launching next Tuesday allows homeowners who are underwater on their mortgages to refinance at today’s record low rates, take at least 10 percent off their principal, and get a new FHA loan that will leave them with positive equity in their home.

FHA estimates some three to four million homeowners could take advantage of the program, called FHA Short Refinance, which would dramatically stabilize housing markets, reduce delinquencies and foreclosures, and make it possible for many “move up” owners to sell and buy a new home that better fits their needs.

As one enthusiast put it, “Now the Short Refinance makes it possible to exchange an upside down mortgage into a right side up one!”

However, lenders must voluntarily agree to write off ten percent of the unpaid principal in order to bring a borrower’s combined loan-to-value ratio to no greater than 115 percent.  Real estate and mortgage professionals around the country fear that the principal reduction, which is also required in modifications under the Treasury’s Housing Affordable Modification Program (HAMP), to be a potential roadblock.

In some markets, where prices are still far below the peak in 2006, homeowners who bought at that time today are far below the 97.5 percent loan to value ratio the new program requires. 

 In addition to getting the lender to eat 10 percent or more of the principal, the program, also requires:

  • The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500.
  • The homeowner must owe more on his/her mortgage than their home is worth.
  • The homeowner must be current on his/her existing mortgage. The property must be the homeowner’s primary residence.

 ”Only time will tell how successful this program will actually be.  Getting the current lender to write off 10 percent of the current balance will eliminate many homeowners,” commend mortgage professional Rodney Mason of Atlanta, GA in a recent Active Rain thread.


‘I don’t see a motivation for lenders to take at least a 10 percent hit on the mortgage for a borrower who is making payments on a timely basis.   That would take quite some persuasion…” agreed a Realtor from California.


“I’m wondering why my lender wouldn’t just go tell me to pound sand, since I’m current on my payments and have a good credit score,” said a consumer.


One lender’s web site advises potential borrowers that they will need to plead hardship.  “We will need to negotiate with your existing lender to get them to agree to a short payoff. Not just anyone will qualify for this, of course, as we will need to demonstrate a need based upon some level of hardship. It’s important that this short payoff include both the first and the second mortgages and have a loan to value of approximately 95 percent of current appraised value,” it said.

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