FHA Short Refi? Fannie and Freddie will not play ball

by Gina Pogol
December 13th, 2010

FHA’s Short Refinance program has gotten off to a very slow start (since the program’s inception in September, a whopping THREE of these loans have closed), largely because mortgage giants Fannie Mae and Freddie Mac have refused to go along with the program. But wait, you say, if the government wants this program to happen, and Fannie and Freddie are under government control, can’t the administration just force them to go along? Unfortunately, it’s not that easy.

What is the program good for?

Federal officials estimate that 500,000 to 1.5 million homeowners could benefit from the program(about 23% of all mortgage borrowers). The backbone of the Short Refinance program is that it requires the reduction of the loan’s principal balance to no more than 97.75% of the home’s value. So the current lender must be willing to strip the loan down and write off the excess before it can be refinanced into a new FHA mortgage. And unlike HAMP applicants, who have to be at risk of imminent default to get approved for their modifications and who are often behind on their payments, FHA Short Refi candidates must be current on their mortgages and their credit must be good enough to meet FHA guidelines. So the program basically asks lenders to take loans that are performing just fine and get rid of them and take a loss as well. Small wonder there is no lender enthusiasm for this program.

But can’t the government force Fannie and Freddie to participate, since it’s in the best interest of the economy and the homeowner’s involved? While FHA leaders and the Obama administration would like to force the GSEs to show their borrowers a little love, a Washington Post article says that other agency folks aren’t so sure about that. The  Federal Housing Finance Agency, which has overseen Fannie and Freddie since their government takeover in 2008,  has concerns that forcing the GSEs to get with  the program could cost taxpayers too much. FHFA is independent of the Obama administration and is charged with minimizing GSE losses.  The companies have already cost taxpayers more than $130 billion.  So when you are pitting the interests of taxpayers against that of some homeowners (who are also taxpayers) it gets less cut-and-dried.

Sen. Richard C. Shelby (Ala.), the top Republican on the Senate banking committee, expressed concern that all taxpayers, including the millions who rent, would be subsidizing those who bought homes in certain parts of the country, or even those who took out second mortgages to buy boats and fund vacations. “While underwater homeowners could benefit from principal write-downs, financing the write-downs through additional losses imposed on taxpayers amounts to a redistribution from taxpayers in general to certain classes of homeowners,” Shelby said.

As Oscar Wilde said, the truth is rarely pure and never simple.

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