Proposed FHA “Short Refinance” Program Facing Obstacles
April 16th, 2010
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- FHA Guidelines: Are mortgage loan write downs the answer?
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As part of the revised provisions of the Home Affordable Modification Program (HAMP), plans are being made to permit FHA to refinance distressed mortgage loans for less than the current mortgage balances. This would theoretically assist homeowners who could not refinance to more affordable mortgages after their homes lost significant value, but how well the proposal will work depends on the ability of the federal government, mortgage lenders and the secondary mortgage market to cooperate. Here are some of the obstacles that can limit participation in this proposed program:
Mortgage write-downs: Someone loses money
Most mortgage loans are sold to investors; the investors hire mortgage servicing companies to collect payments and handle day-to-day administration and maintenance of their mortgage loans.
Investors in securities backed by mortgage loans are unlikely to approve reductions of mortgage amounts. Mortgage loans that have been made part of large investment pools may not be eligible for any type of modification. The thinking behind offering mortgage write-downs make sense when so many homes are worth less than the mortgage amounts against them, but the complex nature of the secondary mortgage market and its rules can sink well-meaning loss mitigation efforts.
FHA refinance option requires lenders to reduce mortgage balances
Although the HAMP provisions under consideration would allow homeowners to qualify for FHA refinancing mortgage at a lower amount, the mortgage would have to be reduced by at least 10 percent. This would require mortgage servicers to get approval from mortgage loan owners/investors and to gain approval from any private mortgage insurance company if applicable. All of this takes time and delays can negate potential advantage of modifying a mortgage as opposed to foreclosing it.
Mortgage lenders: participation in mortgage write-downs voluntary
The federal government can’t force the private sector to agree to lose money by reducing loan balances for accommodating FHA refinancing to lower mortgage amounts. Given the amount of paperwork, and number of eligibility and approval processes required between FHA, mortgage servicers, mortgage investors, and mortgage insurance companies, it seems unlikely that many well intentioned short refinances to FHA mortgage loans will actually be completed.
FHA Commissioner Cites Inability to Help All Homeowners
Testifying before a recent House Financial Services subcommittee hearing on initiatives designed to improve government programs assisting challenged homeowners, FHA Commissioner David H Stevens noted that the FHA, “must balance the need to help struggling homeowners with the recognition that we cannot and should not help everyone.”
Although reducing the balances of underwater mortgage loans may encourage homeowners to keep making mortgage payments, the complexity of the US home loan industry and ethical concerns about fairness to homeowners fortunate enough not to need mortgage help may well quash the FHA short refinance option.
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