FHA offers Short Refinance Program for Homeowners who owe more than their home is worth

Just wondering how this program is working out…

Per a 2010 press release, U.S. Department of Housing and Urban Development – FHA Short Refinance option enables lenders to provide additional refinancing options to homeowners who owe more than their home is worth.

Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain ‘underwater’ non-FHA, non – Fannie & Freddie borrowers – i.e., some of those “creative financing deals-sub prime/Alt A/stated loans”  that were prevalent (from 500,000 to 1.5 million) who are current on their existing mortgage (this seems to contradict some news that lenders advise people to get behind 2+ payments so they can help them with HAMP) and whose lenders agree to write off at least ten percent (10%) of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage. (Note:  This program doesn’t apply to Fannie Mae or Freddie Mac loans.)

Write downs:  First & Second mortgage liens need to be written down to less than 115% of home’s value (probably determined by appraisal).

About 11 million borrowers (about 25% of households with loans) owe more than their home is worth.

About $14 billion of the unused TARP funds earmarked for housing assistance will be used to buy the “lower balance” loans….Let’s hope it’s not as “generous” as the FDIC’s 80% of book loss.

Some problems:  Possible lawsuits by investors whose money from the write downs and lack of incentive by investors to write down unless there is high probability of borrower default.

Some benefits: 

(to Lenders/Investors) – get rid of loans that were already modified and maybe headed there again.

(to Borrowers) – obviously get a lower mortgage and monthly payment, but will the 90% reduction be filed as a lien.

NOTE:  Doing the math…if there is only $14 billion available, then at $200,000 per loan, then only 70,000 borrowers could be helped…even using $100,000 loan balance, than only means 140,000 borrowers – a far cry from 500,000 – to 1.5 million borrowers that the Obama Administration wants to help.

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