Loan Modification

FHA Short Refi: Fannie, Freddie must participate

By Karen Lawson

Infighting between the Federal Housing Finance Agency (FHFA) and FHA could keep the FHA short refinance program from assisting homeowners with mortgage amounts exceeding the current value of their homes. CNBC reports that an inherent conflict of interest between rescuing underwater homeowners through the FHA short refinance program and the FHFA’s mission to protect taxpayers from losses while Fannie Mae and Freddie Mac are under its conservatorship. Fannie and Freddie own a majority of home loans in the US, and their participation in the FHA short refinance program would require their agreement to reduce mortgage balances for short refinance transactions by at least 10 percent. Yes, this would create losses for the two major investors in mortgage loans, but let’s consider the alternatives, which include:

• Foreclosure: State law governs foreclosure procedures, but foreclosing a residential home loan can take as little as a few months to more than a year. During the process, mortgage companies carry non performing loans on their books while incurring foreclosure fees and costs, along with the cost of maintaining, repairing and selling homes that they’ve foreclosed. Delays in completing foreclosure occur when homeowners file bankruptcy or otherwise challenge a foreclosure suit. This can make estimating and managing foreclosure losses very difficult. Why not agree to a 10 percent write off and manage losses up-front?
• Bankruptcy: Although bankruptcy courts typically require bankrupt homeowners to re-affirm their obligation to make mortgage payments, the process of repaying delinquent mortgage payments can take months or years, and necessitates hiring counsel for representing mortgage investors’ interests in court.
• Vacant properties: Many homeowners abandon homes before foreclosure is completed, and may damage the home before vacating. Vacant homes are subject to vandalism and theft, and may attract criminal activity. Mortgage companies may be cited by local officials for public nuisances and code violations associated with foreclosed homes.
• Cost of maintaining and selling foreclosed homes: Mortgage investors typically retain title to foreclosed conventional mortgage loans. This means that they must repair, market, and sell foreclosed homes. This involves hiring contractors, real estate agents, and maintenance workers.  No one can predict when vandalism may occur or emergency repairs may be needed. This makes estimating losses on foreclosed homes a guessing game at best.

FHA foreclosure losses not funded by taxpayers

FHA guidelines encourage mortgage lenders to work with distressed homeowners to prevent foreclosure, but when mortgage lenders incur losses related to defaulted FHA loans, FHA reimburses lenders from funds generated by payment of FHA mortgage insurance premiums by FHA borrowers.  FHA Commissioner David Stevens asserts that the FHA fund for reimbursing lenders is solvent and expected to remain so. In the case of short refinances, mortgage lenders would sustain the cost of  mortgage write downs, plus delinquent mortgage interest, and foreclosure costs if applicable.

Mortgage investors could reduce losses by approving FHA short refinances of delinquent loans rather than taking chances with lengthy and costly foreclosure and bankruptcy filings.

Full post as published by FHA Mortgage Guide on December 21, 2010 (boomark / email).