Loan Modification

FHA Short Refinance Program: Complexities Weighing Down Potential Benefit

By Karen Lawson

Homeowners struggling with mortgages of more than their homes are worth are said to be “underwater.” We’ll continue the marine theme by pointing out that in spite of FHA’s good intentions, its short refinance program is likely to function as an anchor rather than as lifesaver, tossed to drowning homeowners who can’t refinance to current low mortgage rates.

The devil (and the drowning) is in the details. In a past career as a loss mitigation specialist, I quickly learned that the road to a certain inferno is definitely paved with good intentions. In spite of my former employer establishing programs for assisting distressed homeowners, potential solutions often collapsed due to involved parties failing to agree on proposed solutions. Here’s a list of potential decision making entities in an FHA short refinance transaction:

• Homeowners: They may start the ball rolling, but ultimately fail to provide required documentation. The Home Affordable Modification Program  allows implementation of trial modifications pending receipt of required documents from homeowners. Many of these modifications were cancelled due to failure of homeowners to follow through.
• Mortgage servicer: This is a homeowner’s first contact, but if he or she cannot get through, or leaves messages and isn’t called back, experiences limitless processing delays, or is misdirected by clueless employees, short refinance opportunities can quickly crash.
• Mortgage insurance company: If the mortgage being “short refinanced” carries mortgage insurance, (MI) the MI company must approve the terms of a short refinance, as it is responsible for paying the mortgage company’s claim for losses. According to FHA guidelines, existing mortgage lenders must agree to write off a minimum of ten percent of their mortgage amount for a short refinance to occur. The MI company would be liable for this and other allowable amounts claimed by the existing mortgage lender.
• Mortgage investor: Homeowners may not know that the company that originated their mortgage loan is seldom the actual owner of their mortgage loan. Fannie Mae and Freddie Mac typically coordinate with FHA and other government sponsored mortgage assistance programs, but certain mortgage holders may not agree to writing down their mortgage loans for facilitating FHA short refinance transactions.
• Second lien holders (home equity lenders): Under FHA guidelines, home equity lenders must agree to release their liens or subordinate to the FHA refinance mortgage. Homeowners who, to cite a popular claim, used their homes like ATM machines are likely among those underwater. Gaining the cooperation of home equity lenders is not always possible.

The odds of getting all of the players on the same page are very long. Without full cooperation and timely participation of all parties, a short refinance under FHA requirements simply won’t survive the obstacle course of rules, approvals, documentation, and multiple deadlines. Next week, we’ll discuss ideas for bringing  underwater homeowners safely back to shore before they ‘re hopelessly entangled in nets of red tape.

Full post as published by FHA Mortgage Guide on August 31, 2010 (boomark / email).