September 10th, 2010
For Underwater Homeowners, Will The New FHA Short Refinance Program Save You?
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The government is stepping up (again) to help underwater homeowners with the new Federal Housing Administration’s Short Refinance program. The program aims to help borrowers in good standing with their mortgage stay clear of foreclosure and protected from dropping home values. If you haven’t defaulted on your mortgage but you’re slipping underwater, this could be your lifesaver. However, ghosts from past government housing efforts threaten to sink this program before its barely gotten underway.
Lifesaver For A Drowning Housing Market
The new FHA’s Short Refinance program helps certain underwater homeowners, who must be in good standing with their mortgage and never defaulted. The program requires that the lender reduce the principal debt by 10%, and the borrower refinance into an FHA-backed loan at today’s rock-bottom low interest rates.
Here are the program’s qualifications:
- Borrower must be underwater – owe more on their mortgage that their home is actually worth
- Borrower must be current on their existing mortgage, meaning they have not defaulted payments
- Borrower must have a credit score no lower than 500 and have an income that can support loan payments
- Property must be borrower’s primary residence
- Current mortgage cannot be an FHA-insured loan
- Borrower must qualify for new loan under FHA underwriting requirements
- Lender of original mortgage must agree to write off at least 10% of the unpaid principal balance of current mortgage
- Borrower’s combined loan-to-value ratio can be no greater than 115% and loan-to-value ratio of the new FHA-backed loan can be no more than 97.75%
Homeowners who are interested should contact their lenders and see if they are eligible.
Potential Problems Brewing
While the Short Refinance program will help so-called honorable homeowners, those who didn’t walk away from their mortgage or “strategically default”, how many will actually be saved by this program is a skeptical estimate. Obama’s past foreclosure relief program has been under fire from critics for helping only a small fraction of the homeowners it claimed it would.
As Bankrate reports, FHA’s Short Refinance could be likewise “doomed” from the start due for several reasons:
- Lenders are required to write-off at least 10% of the original debt, but how many will comply? Considering this program requires a borrower in good standing who has not defaulted on payments, lenders have no real incentive to write-off 10% of a debt they are currently collecting payments for with no problem. Even with government incentives, lenders may prefer to risk continuing to lend to borrowers rather than take a loss.
- Bankrate points out that the 10% write-off might be much more than that, in order for the loan-to-value ratio is no more than 97.75% and the total combine loan-to-value ratio is no more than 115%. Take this example:
- “If a homeowner owed $185,000 on a house worth $150,000, the write-off wouldn’t be $18,500, or 10 percent of the debt. Instead, the write-off would be $38,375, or almost 21 percent of the debt, to reduce the loan to $146,625, or 97.75 percent of the value.”
- Borrowers must have a mortgage debt-to-income ratio of less than 31% and total debt-to-income ratio of 50% after refinance, which limits the borrowers who can qualify.
- Given the qualifications for the program, no economic hardship is required other than the decline of the home’s value. However, many homeowners are struggling due to a number of factors including declining home values, unemployment, mortgage payments they can’t meet, too much debt, and poor credit. It isn’t the people who can make mortgage payments who need the most help; it’s the people who can’t make payments at all.
As an additional note, keep in mind that this refinance will affect credit scores. Since lenders are forgiving a part of your debt, it will most likely be reported to credit bureaus and impact your score.
Low Expectations, But Some Hope
The Obama administration estimates the program, set to run now until 2012, can help between 500,000 and 1.5 million homeowners. The last government-backed housing relief program has so far helped less than half a million homeowners, though it projected to help 3 to 4 million. This new FHA Short Refinance could also be wildly overestimated and end up disappointing struggling homeowners.
With banks possibly unwilling to write-off homeowner debt and homeowners likely getting stuck in red tape and long applications, another program failure could deal a hard blow to housing market confidence. Let’s hope FHA’s Short Refinance pulls through and rescues a significant amount of drowning homeowners.