FHA short refinance program: Too many obstacles?

by Karen Lawson
September 7th, 2010

As the FHA starts its short refinance program today, we’re left wondering how effective this program can be when it relies upon mortgage lenders being willing to write off a minimum of 10 percent of their loan balances. And then there are the private mortgage insurance companies, who will be left holding the bag for losses resulting from short refinance transactions. And did we mention the convoluted secondary mortgage market that reconfigures individual mortgage loans into mortgage backed securities that are sold to investors? As part of groups, typically called pools, the terms and features of mortgage loans backing the securities may be “cast in cement.” This means that the loans acting as security for the investments cannot be changed, as the investors purchased them according to specific loan amounts and mortgage rates. Mortgage servicing companies, which are the companies to whom borrowers make their mortgage payments, are charged with the responsibility of gaining approval from mortgage investors, PMIs, and finally determining if each short refinance application meets FHA guidelines for completion.

Mortgage loans and foreclosure: The biggest mystery in the lending biz

In spite of mortgage investors, servicing companies and PMIs  knowing that foreclosure is costly and requires huge amounts of time and effort, these invested parties have all traditionally shunned the idea of writing down mortgage balances to prevent foreclosure. Although partially caused by the logjam described above, where mortgage servicing companies are at the mercy of mortgage investors’ requirements, there must be some way for FHA. mortgage investors, mortgage servicing companies, and PMIs to agree upon standardized criteria for approving upside down mortgage loans for “short refinancing.”

Now or later: Absorbing mortgage losses up front, or after foreclosure

What’s so wrong with taking a measurable loss up front as compared to allowing a loan to go into foreclosure, which can take months to years, having homeowners file bankruptcy or other legal remedies, which may take more months or years to clear, and accruing thousands of dollars in lost interest and legal fees? Add to the foreclosure expense the cost of maintaining and selling homes that are not bought at foreclosure sales or auctions, and mortgage lenders are losing money that could be saved by writing down mortgage loans to affordable levels and preventing foreclosure.

FHA guidelines: Getting everyone on board

Before FHA touts its program offering short refinance transactions, the agency would do well to gain advance cooperation from mortgage investors and mortgage insurance companies. Otherwise, critics will have a field day describing how FHA and the current administration of have failed to provide relief to struggling homeowners, while the homeowners are left to wonder why none of the government’s foreclosure avoidance programs are working.

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