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‘Doomed’ FHA short refi starts

By Marcie Geffner ·
Friday, September 10, 2010
Posted: 1 pm ET

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.

And finally,

• 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?

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October 05, 2010 at 7:00 pm

Anyone see a list of participating lenders? They had until 10/3 to decide if they were going to participate; someone should be putting out this list. And when can we expect a GAO report quantifying the program's failure?

Marcie Geffner
September 21, 2010 at 9:05 pm

Indeed, many homeowners who have adjustable-rate mortgages can't now refinance into fixed-rate loans. But that's the risk they accepted because they wanted the benefit of the lower initial payments. It's the nature of an adjustable rate that the risk can't necessarily be backed out of when the situation changes.

September 17, 2010 at 12:46 am

One of the problems is that homeowners who would ordinarily qualify for a re-fi at current record-low rates are severely underwater simply because the market took a dive. Some of them still have adjustable loans that will go up as the economy recovers and interest rates rise.

Why not simply try to get them into stable 30-year fixed-rate mortgages? And can we please start making some distinctions between those who cashed in their equity to buy luxuries versus those who did not?

Surely, if we can talk about reducing underwater balances, we can talk about loans to pay them off. Many homeowners do not want their scores trashed and are not asking for debt forgiveness. They are committed to their homes and communities and intend to pay their mortgage even though their home's value took a hit. But they are on the outside looking in as mortgage rates continue to fall several percentage points below the rates they are paying. That's a shame.

Marcie Geffner
September 14, 2010 at 8:16 pm

So, not only does no think the FHA short refi plan is likely to work, but now--thanks for the comments, folks--we also have some more reasons why it's doomed. The big announcement with much fanfare sound great, but the details are in the fine print and the numbers just don't seem to add up for anyone.

September 14, 2010 at 7:26 pm

This will not work. Short-refi's will only work if the investors have paid 50 cents or less on the dollar for mortgages. I worked for a company last year whose sole income source were short-refi's. The beauty of it was that the investor purchased these exotic mortgages for 40%-50% of it's value. They would then agree to forgive 20% to as much as 40% of the mortgage and still profit 10% to 30%. Additionally, the investor would pay for all of the clients' closing costs. We would then refinance the lower loan amount into a new FHA loan. I've helped countless clients reduce their principal balance by as much as $180,000 through this system. It was an advantageous arrangement for all parties.
The reason the new FHA Short-Refi program will not work is because there are no incentives for the owners of mortgages to do anything on performing loans. Why would they? Even if they agree to some kind of reduction, will they agree to pay for the borrowers' closing costs? Keep in mind that on an FHA loan you not only have the usual refinance closing costs but you also have the Upfront Mortgage Insurance Premium. Are we ready to believe lenders are willing to pay for that too? The only lenders I foresee agreeing to some kind of reduction are ones whose mortgages are already 30-90 days late. But since FHA cannot approve loans with recent mortgage lates, this borrower has no other choice since he/she cannot refinance under this program anyway even if there is a substantial balance reduction agreement.

G. Turner
September 13, 2010 at 9:52 am

This program is window-dressing, with zero practicality or chance for success. A poorly thought out program to make it appear as if the government was working on real solutions to the housing crisis. Make it look like you’re doing something but not really accomplish anything. Those who can, do; those who can’t, go into politics.

In some of the hardest hit areas (Arizona, California, Florida and Nevada) homeowners are as much as 50% underwater. Is it realistic to think that a lender would voluntarily forgive that high a percentage, plus an additional 2.25% to bring the LTV down to the required 97.75%, for an incentive? I don’t think so.

And I find it interesting that if I, as a taxpayer who bailed out these lenders, apply and qualify for assistance under this program, my credit history will be significantly damaged. Lenders were bailed out in part on my dime and allowed to continue doing business, while in many cases making significant profits, without any noticeable penalties.

Now that those bailout loans have been repaid by lenders (with interest) and I want to tap into some of my return on investment, I will be denied or penalized. And from a big-picture perspective, how does ruining my credit help the economy? I won’t have access to credit, which means no purchasing power; new car loans, etc. Doesn’t make a lot of sense.

September 12, 2010 at 1:04 am

What happened to the Mortgage Rate Trend Index?
No update this week?

September 11, 2010 at 2:50 pm

Boy, I got all excited when I heard the news...and then came the reality which no one seems to be talking about. The limit to the amount one is underwater. Only 25% over the present value. I have lived in this home for nineteen years and spent seven years underwater, from the day of purchase. That wasn't a problem at the time. Now after refinancing to payoff an extended Chapter 13 (extended because the lawyer made mistakes in the first filing and taking real equity out of home during the "boom") I owe 197000 on the first note (origianlly 170000, down to 168000 at the beginning of financial hardship that has lasted for nearly two years; getting a modification that added the 29000 onto the loan, lowered the interest and did nothing to extend the life, but now in a permanent modification) with 60000 on the second, who has never attempted to modify) the amount of my underwater loan does not qualify.
Getting our hopes up for nothing is harmful to all. All loans extremely underwater need to be refi'd at a longer term lowest rate and the penalties and fees removed so the middle class can continue to support our communities and our families.
Thank you for allowing me to comment.
I will be walking away from the financial explosion I had very little part in creating. Greed created it and those with the fruits of that greed are unlikely to be a loving human being and do anything to remedy the situation for anyone.