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FHA short refinance program’s fatal flaw

by Gina Pogol
September 27th, 2010

FHA’s “Short Refi” voluntary program was designed for sound bites I think but not to provide any real help. It sounds good: Prevent borrowers from walking away from underwater mortgages by refinancing them to a new mortgage of less than the property’s value. The incentive to walk away goes away. The lender gets a potential problem off its books. Everyone can exhale. Right?

Wrong. The fatal flaw of the new refinance program is the word “voluntary.”

Borrowers eligible for the program must be current on their mortgages. Their lender must agree to write off enough of the underwater mortgage so that a new loan of no more than 97.75% of the home’s value can be underwritten, approved, and funded by an FHA lender. So those who have fallen behind, or those with credit or income problems won’t be helped. In fact, the program is designed to help those homeowners the lenders are least-inclined to assist.

Imagine. You are a mortgage lender and you have a borrower who is paying faithfully on a loan at a rate higher than the current market because he or she can’t refinance the underwater loan. So of course you are just dying to write off a large chunk of cash and get rid of one of of your most profitable loans.

Case in point: Fannie Mae and Freddie Mac have both so far declined to participate. Can you blame them? if a borrower defaults, after all, they recoup some money from mortgage insurers or in some cases by forcing originators to buy back the loan. If they forgive principal, those provisions go off the table and they trade in the possibility of loss for the certainty of it.

Think you might qualify and that your lender might go for this? Here are the requirements:

  • Must occupy subject property as their primary residence
  • Must be current in your mortgage loan
  • Must be in a non-FHA loan
  • Credit score must be at least 500
  • Bank must agree to write off at least 10% of principal and
  • Second mortgage must be willing to cooperate (if applicable)

I’d be very interested in hearing about the experience of anyone applying for this program.

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This entry was posted on Monday, September 27th, 2010 at 1:11 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

11 Responses to “FHA short refinance program’s fatal flaw”

  1. Darin Says:

    BB&T is my lender and they said they are not participating in this program. When I called the FHA customer service line to ask them to let me know of ANY lenders who ARE participating they said it’s too early at this point and they aren’t sure. They said that it is ultimately up to your lender to forgive a portion of you loan (which is true), but exactly like your article points out they won’t do this. Seems like alot of fluff to me, especially since I can’t find anyone that will do it.

  2. Renee Says:

    I currently have a mortgage w/ Chase Home Finance. I am and have always been current on my mortgage (and all bills) and meet all other qualifications for the program. Chase also states they are not currently participating in this program. We bought in 2007 and currently owe 220,000 for a house that is currently worth (according to Chase) 145,000. So a strategic default is looking better and better all the time. We cannot keep going like this, something needs to be done. I have almost an 800 credit as well as my husband. We are moral people but I am tired of being taking advantage of!!

  3. Bob A, Says:

    I also have a mortgage with Chase.
    They also told me they are not particapating.
    Why would they – I am paying my bill!
    I would be willing to keep the balance as it is and just refi to the current rates.
    I bought in May of 2006 and am paying 6.375.
    I would love to have today’s 4.375!

  4. Linda C Says:

    It’s really going to be messy out there. Make sure you got your boots on….lots of mud, slush and pure bullshit. The banks will never help the people that need it. This has been going on for years now….really YEARS… probably be like this for another 5. Very sad, very sad what has happened in America…can we really still call this place “Land of the Free” – so sad, all the suicides, people just want out – poverty, domestic violence, so sad to see all the bad things in life just becoming the norm. Peace be with you

  5. Bayley Says:

    Central Mortgage told me to go pound sand.

    Awesome.

    I’m glad I’ve been such an outstanding example of doing what is ‘right’ (paying ALL my bills on time) why my neighborhood (metro Detroit) has been devastated by the countless numbers of families who have simply up and walked away.

  6. s2kreno Says:

    Very sorry to hear this but not surprised. Next time they craft a program to help homeowners, they should probably get the input of some actual homeowners.

  7. Fadel Says:

    My Bank, IndyMac or OneWest is not participating. Nobody at the bank seemed to know anything about this program. I am current on my mortgage for the last 5.5 years. My house value dropped by 50%. In my opinion, this program is lip service conceptualized by the Obama Adminstration in the begining of the year to give people false hope.

  8. Chris Says:

    Wells Fargo, not partipating. Was told they are weighing the risks to their portfolio. Goverment and lenders know exactly what they are doing. Was ready to stop payments this month when I found out about FHA short refi, now I will continue to pay just in case they, Wells Fargo, ever decide to come around and take care of the people that take care of them.

  9. Sean Says:

    At first I thought this was a good thing for the consumer, But then I realized it is more to help the banks. Why? This program will keep people like Chris (above) making their payments in hope that the FHA program will eventually be accepted by the banks. This is just another way to keep the frustrated, good credit, on-time payment making consumer from defaulting on their loan. Nice trick!

  10. Anne Says:

    I was told by Chase Mortgage that they ARE participating in this FHA Short Refinance program, but that it will take longer to get it going because they have to “update their systems to handle this type of refinance”. The Chase representative told me it typically takes them 3 to 4 months to implement a new program like this from the time it is released. While we wait, we pay. What else can one do? Without staying current, one no longer qualifies for this progam! It does feel as though they are just squeezing a few more interest payments out of those mortgages. Also, the representative assured me that Chase would send out mailers to everyone who qualified for this refinance once it was implemented. We’ll see. At this point, only time will tell.

  11. Dan Says:

    What is that old saying? No good deed goes unpunished. I pay my bills on time and meanwhile my house loses 140,000 in worth. I am struggling to maintain but will keep trying. Why is the participation by lenders and banks voluntary? This bill might as well be flushed down the toilet. It has nothing to do with reality. I am frustrated beyond measure. If something isn’t done quickly then I believe that more people are going to walk away from their mortgages. What will happen to the housing crisis then? The complete house of cards will probably collapse and cause total devestation.

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