FHA to Offer ‘Short Refinance’ Option for Underwater Borrowers

The Federal Housing Administration will offer homeowners who owe more than their home is worth a new “short refinance” opportunity beginning Sept. 7, but there are several requirements that “underwater” borrowers must meet and lender participation is voluntary.

The refinance option will be offered to certain non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage.

Those borrowers will have the opportunity to qualify for a new FHA-insured mortgage – but they must be current on their payments.

Initially announced in March, the short refinance program falls under the Obama Administration’s larger foreclosure rescue effort, Home Affordable Modification Program, HAMP.

Under fire by critics for not sufficiently addressing the vast number of borrowers in negative equity, HAMP has been plagued by borrowers defaulting from reduced-payment modification trials.

In a report last month, the watchdog that oversees the funding mechanism for HAMP urged the U.S. Treasury to make either discretionary or mandatory the program to rescue borrowers from foreclosure through mortgage principal reductions.

Treasury officials have maintained the voluntary nature of the program, citing concerns that such a move would spark more cases of strategic defaults, or borrowers “walking away” from their mortgages despite the ability to make the monthly payments.

“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” said FHA Commissioner David H. Stevens in a statement Friday. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”

The FHA has published a mortgagee letter to provide guidelines to lenders on implementing the new short refinance option. Participation is voluntary and requires the consent of all lien holders.

Moreover, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

The FHA urges homeowners who might be interested in the program to contact their lenders to determine if they are eligible and whether the lender agrees to the write-down a portion of the unpaid principal.

See Related Articles:

• Report: 75% of Top Metro Areas See Higher Foreclosure Activity
• Watchdog Urges Mandatory Mortgage Principal Reductions
• Foreclosure Rescues: Cancellations Outpacing Approvals in HAMP
• Properties Hit with Foreclosure Filings on Record Pace: RealtyTrac