Loan Modification

FHA refinance plan comes up short

By Peter G. Miller

It sounded like a nice idea when HUD announced a new FHA mortgage effort last summer: the short refinance program would help troubled homeowners get better rates and terms, including folks with credit scores of not more than 500.

A fine idea. A decent thought. A program which in a nation of 300 million people has so far produced just 40 loans since October 1st.

The catch is that looking at some local markets you have to wonder why there isn’t more demand for this program — from lenders.

Details

The major idea is to help borrowers with good credit but no equity, the person who has a $200,000 home but owes $225,000 to a first lender.

In general terms what would happen with a Short Refinance is this:

The homeowner must owe more than the property is worth but must also be making full and timely mortgage payments. No investors are allowed, the property must be owner-occupied and not financed by the FHA.

So how do we help the homeowner?

The lender volunteers to participate in the program and agrees to write off 10 percent of the mortgage debt. The new loan-to-value ratio for the first mortgage cannot be more than 97.75 percent of the property’s value.

Okay, so our borrower owes $225,000 for a property that’s worth $200,000. If we refinance for an amount equal to 97.75 percent of $200,000 the new loan will have a principal balance of $195,500. The lender will lose $29,500. That’s more than 10 percent of the original loan amount.

What’s surprising about the FHA refinance plan is that just 40 lenders have agreed to it. The question is: Why not more?

Local Markets

When the Short Refinance program was first introduced, FHA Commission David H. Stevens said “We?re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined. This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.?

Actually, something else is going on here. Yes, families will be helped but it’s amazing more lenders have not picked up on the FHA plan.

Not all lenders, but lenders in the nation’s foreclosure centers. The erosion of home values in those areas is so great that refinancing a mortgage with a 10-percent loss is a gift to lenders who otherwise would be in a much deeper hole.

According to RealtyTrac, 10 states posted foreclosure discounts of more than 35 percent in 2010.

“Ohio foreclosures sold for an average discount of nearly 43 percent in 2010, down from an average discount of nearly 47 percent in 2009, but still the highest of any state. Kentucky foreclosures sold for an average discount of more than 40 percent in 2010, the second highest of any state and up from nearly 38 percent in 2009.

“Eight other states posted average foreclosure sale discounts of 35 percent or more in 2010: Tennessee, California, Pennsylvania, Illinois, New Jersey, Michigan, Georgia and Wisconsin.”

It’s remarkable that more lenders in troubled areas do not take advantage of the FHA program, and it’s also remarkable — and hardly shrewd –that the FHA is willing to touch the riskiest loans in the worst-hit real estate markets.

Full post as published by FHA Mortgage Guide on February 28, 2011 (boomark / email).