Loan Modification

FHA Short Refinance Program Assisting Underwater Homeowners?or Not

By Karen Lawson

HUD and FHA have finally grasped what the mortgage lending industry seems slow to accept. Mortgage lenders can reduce mortgage rates, add past due payments to mortgage balances, and extend mortgage terms, but unless you address dramatic drops in home prices, loan modifications are likely to fail.

Owing more on a mortgage than your home is worth creates problems including inability to relocate for a new job, and losing potential buyers when mortgage lenders take forever and a day to approve a short sale. Homeowners faced with owing more than their homes are worth have less incentive to continue making payments, and is some cases are choosing “strategic default” and walking away from a no-win situation.

FHA Working with Mortgage Lenders to Avoid Foreclosures

A primary reason why homeowners “underwater” with their mortgages are walking away is lenders failing to allow write-downs of mortgage amounts in response to falling home values. FHA is working to provide help for such homeowners, but their ability to complete a “short refinance” is contingent upon lender cooperation:

• Mortgage lender participation is voluntary; FHA cannot force lenders to approve short refinance transactions.
• Mortgage lenders must agree to write down at least 10 percent of the existing loan balance
• All lien holders must approve a short refinance. Typically, this means that home equity lenders must agree to release or subordinate their liens to the new refinance mortgage.
• If the loan being refinanced carries private mortgage insurance, the private mortgage insurer must also agree to the terms of the short refinance.
• Existing mortgage loans must be paid current.

These conditions are likely to sideline any potential short refinance transactions. Participation in the short refinance program is not limited to current FHA borrowers; FHA is allowing homeowners with conventional mortgage loans the opportunity to escape their underwater loans by “short refinancing” to an FHA mortgage. Unfortunately, the potential number of agency approvals required is going to ruin this opportunity for many deserving homeowners; If your private mortgage insurer doesn’t approve a short refinance, it won’t matter that your primary mortgage lender and home equity lender are willing to go along.

FHA Short Refinance and Loss Mitigation Efforts: Time is Thine Enemy

A major problem for FHA and mortgage lenders in implementing successful solutions for preventing foreclosure is time. As with the example above, mortgage lenders, mortgage insurance companies, second lien holders, and in the case of short sales, the new buyers have to agree to the terms of the loss mitigation program. One problem can sabotage the entire effort.

Another problem is getting homeowners to meet time lines imposed by lenders and other stakeholders. Streamlining and standardizing documents required of homeowners would help move the process along, and could help prevent losing buyers for short sales and missing deadlines for other foreclosure prevention programs.

If loss mitigation programs, including FHA refinance mortgages for underwater homeowners, are going to work, everyone involved must get on board with a standardized documentation and approval process.

Full post as published by FHA Mortgage Guide on August 11, 2010 (boomark / email).