FHA short refi program likely to end

by Peter G. Miller
March 7th, 2011

The House Financial Services Committee has agreed to end the FHA’s short refinance program for homeowners facing foreclosure. The vote was 33 in favor and 22 against the proposal. To become law the bill must also be passed by the House, the Senate and then signed by the President.

Under the FHA Refinance Program Termination Act HUD will no longer be able to provide assistance under its short refi program.

The short refi program was introduced last year to help borrowers with good credit but negative equity. It required first lenders who participated in the program to write-off at least 10 percent of the principal debt. Lender participation was voluntary, lenders were not forced to write off principal amounts.

No Impact

If HUD is going to lose an FHA mortgage plan than this is surely the one to lose. As we have pointed out, the short refi concept has simply had no marketplace impact.

FHA Commission David H. Stevens told the subcommittee that since September 7, 2010 the short refi program had produced 245 loan applications and 44 new mortgages.

The 44 lucky borrowers who got FHA mortgages under the program did very well. They moved from negative equity to an FHA loan with fixed rates and actual home equity. Stevens said the typical results looked like this:

  1. Initial Appraised Value: $285,403
  2. Unpaid Principal Balance – 1st lien: $308,982
  3. Lender Write off: $77,546
  4. New FHA Insured Loan: $248,415
  5. New Financing Loan-to-Value Ratio: 91.41%
  6. Qualifying Ratios to Income (mortgage payment / total debt): 25.28/40.92
  7. Credit Score 711

If you look at the numbers you can quickly see why few lenders were eager to embrace FHA loan requirements: The typical short refinance produced a lender loss of more than $77,000.


The only condition under which the FHA short-refi would be attractive to lenders might be a situation where the local marketplace was so awful that a foreclosure would produce even worse results. In the major foreclosure centers — say California, Arizona, Nevada, Florida and Michigan — you can see situations where the short refi plan might gain some traction with lenders.

But, if the local market was so distressed that lenders were willing to take massive losses is that really where the FHA should be insuring loans? Don’t new mortgages in such areas represent a considerable risk to FHA reserves, especially if done on a large scale.

The effort to end the short refi program is not a done deal, it has merely passed through a House subcommittee. But this program is small, has no practical impact and if it was more successful it might represent a bigger — and negative — impact on the FHA program. Moreover, many in Congress are opposed to lender principal write-downs as a matter of policy, another concern which taints the program.

At a time when even good government programs are under attack, the short-refi program has little chance. Expect it to be gone.

If you would like to refinance under the FHA short refi program see if you can get your lender involved — and move quickly while there is something with which to be involved.

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