Loan Modification

FHA short refinance program?s fatal flaw

By Gina Pogol

FHA’s “Short Refi” voluntary program was designed for sound bites I think but not to provide any real help. It sounds good: Prevent borrowers from walking away from underwater mortgages by refinancing them to a new mortgage of less than the property’s value. The incentive to walk away goes away. The lender gets a potential problem off its books. Everyone can exhale. Right?

Wrong. The fatal flaw of the new refinance program is the word “voluntary.”

Borrowers eligible for the program must be current on their mortgages. Their lender must agree to write off enough of the underwater mortgage so that a new loan of no more than 97.75% of the home’s value can be underwritten, approved, and funded by an FHA lender. So those who have fallen behind, or those with credit or income problems won’t be helped. In fact, the program is designed to help those homeowners the lenders are least-inclined to assist.

Imagine. You are a mortgage lender and you have a borrower who is paying faithfully on a loan at a rate higher than the current market because he or she can’t refinance the underwater loan. So of course you are just dying to write off a large chunk of cash and get rid of one of of your most profitable loans.

Case in point: Fannie Mae and Freddie Mac have both so far declined to participate. Can you blame them? if a borrower defaults, after all, they recoup some money from mortgage insurers or in some cases by forcing originators to buy back the loan. If they forgive principal, those provisions go off the table and they trade in the possibility of loss for the certainty of it.

Think you might qualify and that your lender might go for this? Here are the requirements:

• Must occupy subject property as their primary residence
• Must be current in your mortgage loan
• Must be in a non-FHA loan
• Credit score must be at least 500
• Bank must agree to write off at least 10% of principal and
• Second mortgage must be willing to cooperate (if applicable)

I’d be very interested in hearing about the experience of anyone applying for this program.

Full post as published by FHA Mortgage Guide on September 27, 2010 (boomark / email).