FHA Short Refinance: Does Anyone Think this Will Work?!

by Gina Pogol
August 9th, 2010

In case you’re interested, here are the 2 steps involved for participating in this program:

1. You, a homeowner with a non-FHA mortgage that you are paying as agreed, ask your current mortgage lender to write down your outstanding balance by at least 10% so that you can replace the loan with an FHA mortgage.

2. Your lender says no.

Introducing the newest FHA mortgage help, the (drum roll, please) FHA short refinance. It allows people with underwater mortgages to refinance to an FHA mortgage at today’s low mortgage rates. Um, doesn’t this sound like deja vu all over again? Like some mash-up of Hope for Homeowners (H4H) and Home Affordable Refinance Program (HARP)? But let’s get excited; we all know how successful those programs have been…..or not.

Why would a lender with a mortgage in good standing agree to blow off a chunk of the principal balance? Lenders have enough mortgages going sideways to worry about; they won’t waste their time and effort to make you a 10%-plus gift when you are current on the loan and they are not required to by law.

Consider the “success” of HARP. With HARP refinances, underwater borrowers in good standing may refinance a Fannie Mae or Freddie Mac mortgage up to 125% of the current value of the property. But its success has been limited, largely because conforming mortgage lenders have tightened underwriting guidelines, people troubled by the economy have lower credit scores, and the cost of refinancing has increased considerably. Only a few hundred thousand of the several million underwater homeowners who were supposed to benefit from HARP were able to refinance. Similarly, FHA short refi will have to contend with the fact that FHA lenders have tightened up underwriting guidelines, and FHA refinancing has recently become more expensive.

HAMP applicants have been even less successful. Loan servicers are able to have the government offset the cost of modifying loans that are NOT performing, which would provide the investors with continuing income streams, and yet lenders are kicking a lot more folks out of the program than they are helping, and foreclosures continue unabated.

Remember Hope for Homeowners? That program was similar to the FHA short refi, except the borrower didn’t have to be current on the mortgage, and the lender could recoup some of its write-down if the property appreciated before the borrower sold it. In other words, there was both a bigger stick (the loan was not performing) and a bigger carrot (the lender could recoup some costs), than there is for the FHA short refinance, and yet H4H flopped.

Now FHA wants you to just tell your lender to eat 10% or more of the balance of a loan that IS performing. And the figure could be considerably higher. Imagine a Florida condo with a $270,000 mortgage and a value that dropped from $300,000 to $180,000. FHA wants the lender write off $94,500, which is the $270,000 balance less 97.5% of $180,000.

Don’t see this happening.

The program is voluntary.

The stick is too small.

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