The Federal Housing Administration, or FHA, has opened its doors for the "short refinance" program that's supposed to help homeowners who owe more than their home is worth. But skeptics -- including my colleague Holden Lewis, who is on vacation this week -- have already taken a dim view of the short refi program as unlikely to succeed at its goals.
That opinion seems justified, and here's why:
• The homeowner's lender must voluntarily write off at least 10 percent of the unpaid balance of the loan. In lender-speak, "voluntary" usually means "no."
• The actual writeoff required in many cases may be much more than 10 percent because the loan-to-value, or LTV, ratio on the new FHA-backed loan can be no more than 97.75 percent, and the total combined LTV on all of the homeowner's financing must be no more than 115 percent.
For example, if a homeowner owed $185,000 on a house worth $150,000, the writeoff wouldn't be $18,500, or 10 percent of the debt. Instead, the writeoff 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. That's unlikely to be an attractive proposition, though presumably the homeowner could cash in the difference.
• The government will offer incentives to gain the cooperation of second-lien lenders. But so far, such incentives haven’t bought much cooperation.
• The homeowner must be current on the loan payments, occupy the home as a primary residence, meet the FHA's qualifying requirements, not already have an FHA-backed loan and pay for FHA mortgage insurance on the new refinance loan. No economic hardship is required other than the decline in the home's value.
• Homeowners who qualify should expect the usual maze of paperwork, hard hit to their credit record and possibility of income tax on forgiveness of mortgage debt.
• Homeowners will be selected for the program by investors who own mortgage-backed securities on the theory that they may prefer a writeoff to a walkaway.
Does anyone think that's likely to work?