FHA guidelines: Why FHA short refinance program isn’t working

by Karen Lawson
December 18th, 2010

FHA Commissioner David Stevens has characterized the FHA short refinance program as the “single most effective way” to assist homeowners owing more on their mortgages than their homes are worth, but mortgage lenders are lagging in their participation. Why, when mortgage companies risk losing even more when they foreclose mortgage loans and get stuck with repairing, maintaining and selling foreclosed homes? Although this makes no sense to anxious homeowners who cannot sell or refinance to today’s low mortgage rates through no fault of their own, the complexities of the mortgage industry often get in the way of  common sense.  Here’s why:

FHA short refinance: Why so little response?

Gone are the days when you could take out a mortgage loan from your local bank and deal with the same banker for as long as you had the mortgage loan. Mortgage loans are now packaged and sold to investors including Fannie Mae and Freddie Mac, and other investors, which may include pension funds, mutual funds, and others. Most homeowners never have a problem with this process until they need help from their mortgage company. The entity that owns your mortgage is not the same as the mortgage servicing company that collects payments, pays your property taxes and insurance, and assists with any business related to your home loan. Although the first line of communication, the mortgage servicing company must follow guidelines established by the actual owner(s) of your mortgage loan.

Mortgage investors buy mortgage loans based on sepcific mortgage loan balances and interest rates. The investor expects a return on investment based on these amounts. Loans may be sold individually or in blocks  called mortgage backed securities (MBS).  MBS consist of loans with the same mortgage rates and maturity dates. Changing the terms of MBS mortgage loans skews the amounts and potential yields for investors in MBS.  Mortgage servicing companies can remove defaulted loans from MBS, but in general, this cannot occur until a mortgage loan is seriously delinquent. Understandably, homeowners who are current with their mortgage payments are unwilling to let their loans go delinquent without any guarantee that an FHA short refinance  will be approved or completed.

Mortgage industry complexities compromise relief efforts

These issues and others tie the hands of mortgage servicing companies dealing with customer requests for assistance. In addition to following FHA and investor requirements, private mortgage insurance (PMI) companies must also approve any changes to mortgage loans that they insure.  Multiple approval requirements and timeliness is exasperating for homeowners, costly to mortgage investors, and amounts to insanity for mortgage servicing pros who must coordinate between the regulations and priorities of FHA, mortgage investors, PMI companies, and homeowners. Given the extraordinary nature of current housing markets and the depleted economy, it seems that some day, some how, all of the players must coordinate toward preventing  foreclosures, promoting home sales, and assisting homeowners struggling with keeping, selling, or refinancing their homes.

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