New FHA Refinance Option For Troubled Borrowers

by Peter G. Miller
March 29th, 2010

It was in 2007 that President Bush announced the FHASecure program, a program which would allow distressed conventional borrowers to refinance with FHA mortgages. The program never went anywhere — just 4,110 distressed conventional mortgages were actually refinanced — but now the government is trying again, this time with “enhancements” for troubled borrowers.

The basic idea, once more, is to move borrowers from conventional loans into FHA financing. For those with toxic loans this FHA Refinance Option program could be enormously valuable, but many distressed borrowers will not qualify for assistance. As the government explains:

“The new FHA loan must have a balance less than the current value of the home, and total mortgage debt for the borrower after the refinancing, including both first and any other mortgages, cannot be greater than 115 percent of the current value of the home.”

To make this happen, the government is putting up $14 billion in TARP money to offset lender losses, especially those with second liens who otherwise would likely lose everything in a foreclosure.

For all the yelling and screaming about the FHA mortgage program, the bottom line is that it represents mortgage sanity. By letting qualified borrowers into the program — borrowers with smaller loan amounts and lower monthly payments than they now face — we should be able to reduce foreclosure levels and thus the inventory of unsold homes which is holding down home prices.

The particulars of the enhancement program, as explained by the government, are below. The program will be available in the Fall. For specifics, please speak with lenders.

FHA Refinance Option

1. FHA Refinance Option for Underwater Loans –Encouraging Responsible Restructuring and Refinancing

___Voluntary option encourages lenders and borrowers to work together, when appropriate, to restructure underwater mortgages. Because it is voluntary for lenders, not all underwater borrowers who meet criteria below will receive an FHA refinance loan.

___ Enables refinancing into more sustainable loans that are no higher compared to the value of the home than the standard FHA refinance loan (97.75 percent).

___ Lenders write down principal of the original first mortgage at least 10 percent to reduce the debt burden on borrowers, though we expect the average principal write-down to be significantly more than that.

___ Enables refinancing to a reduced monthly payment at current low interest rates to facilitate affordable homeownership.

___ Homeowner Eligibility

A. Homeowners must be current on their existing mortgage. They must occupy the home as
their primary residence, fully document their income and have a qualifying credit score.

B. As with any loan forgiveness, this short refinancing should be reflected as a negative feature on a borrower’s credit score.

C. Option is available to homeowners with mortgages not currently insured by the FHA.

2. Incentives for Principal Write-downs on Second Liens

___ All mortgage debt including second liens must be written down to a maximum of 115 percent of the current value of the home to qualify for the refinance.

3. Transparency on Impact of These Refinancings

___ FHA will publish data on number of loans, average percentage written down and quantity of principal reduced quarterly.

4. TARP Funded Support to Expand Impact of Refinance Option

___ TARP funds will be made available up to a total of $14 billion to provide incentives to support writedowns of second liens and encourage participation by servicers, and to provide additional coverage for a share of potential losses on these loans.

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2 Responses to “New FHA Refinance Option For Troubled Borrowers”

  1. Ellen Robertson Says:

    Homeowners must be current on their existing mortgage.—Most homeowners were current, until lenders wouldn’t talk with them unless they were 3 months behind.

    Voluntary option encourages lenders and borrowers to work together, when appropriate, to restructure underwater mortgages. Because it is voluntary for lenders, not all underwater borrowers who meet criteria below will receive an FHA refinance loan.—Sure this option let lenders just tack-on the late fees, financial charges and call it a modification loan–NOW the borrower owes more than what they started and their payments are higher.

    Some help.

  2. Carole Says:

    This does not help people with FHA loans that are underwater and with the inability to refinance because it is underwater. The only option I see for these people is walk away. I am almost retired and find that I will never have equity in my home if I live to be 120. If I walk away, I will have a period to save some money as a substitute for the equity I will never have.

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