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FHA announces a doomed short refi

By Holden Lewis ·
Monday, August 9, 2010
Posted: 2 pm ET

Do you owe way more than your house is worth because property values went down? Are you on time with your mortgage payments? Are you optimistic and lucky? Is your mortgage not insured with the FHA? Do you have time and energy to spend countless hours on the phone with lenders, jawing with customer service reps who know less about the mortgage business than you do?

If you answer yes to all the above, the Federal Housing Administration has a program for you.

Last week the FHA announced a new short-refi program. Under this plan, you can refinance your current mortgage at today's low rates and get an FHA-insured home loan.

There's one catch: Your current lender -- the one that you're making on-time payments to -- must agree to write off at least 10 percent of what you owe. And if you have a home equity loan or line of credit, that lender must agree to remain in the subordinate lien position. The FHA would prefer the home equity lender to write off all or some of that loan amount.

So let's say you bought the house for $200,000 in 2005, and now it's worth $150,000. You owe $185,000, which means that you owe 23 percent more than the house is worth.

To get an FHA short refi, the lender would have to forgive at least $18,500 of your debt -- that's 10 percent of what you owe. In reality, because the FHA loan can't be for more than 97.75 percent of the appraised value, the lender would have to forgive enough debt to get you down to $146,625. So the lender would have to forgive $38,375, or almost 21 percent of what you owe.

After persuading the lender to do that, you would have to talk the home equity lender into resubordinating its loan, and maybe forgiving some of that debt, too.

Debt forgiveness, even when blessed by the government this way, takes a toll on your credit score.

The FHA estimates that between 500,000 and 1.5 million homeowners will take advantage of the short refi program, which begins Sept. 7 and runs until the end of 2012. As usual, they're probably wildly overestimating how many people will take advantage of the program. Lenders aren't gonna play ball on this, no matter how much the taxpayers paid to save their bacon.

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Holden Lewis
August 13, 2010 at 1:37 pm

You got it. There are few incentives for loan servicers to participate, and even fewer incentives for investors and subordinate lenders to participate. It reminds me of the Hope for Homeowners program, which went down in flames.

August 13, 2010 at 1:13 pm

Thanks Holden, I just read through the mortgage letter PDF and I didn't see any mention of why a lender would agree to participate in the program (incentives). I guess that's why you referred to it as a "doomed short refi"?

Holden Lewis
August 12, 2010 at 2:57 pm
August 12, 2010 at 2:35 pm

Holden, any chance you can provide a link with more information about this short-refi program?

August 11, 2010 at 11:22 am

This sound like a great program, but it does sound like it will be very difficult for the average home owner to take advantage of this scenario.

This may be one situation where the consumer may wish to get an advocate to assist them with the process

Jim Brown
August 11, 2010 at 7:07 am

Mr. Lewis I have something for you to read. I wrote it in Nov 2008. I have been a mortgage banking professional 25 years. Please send me your email address and I will forward to you. when you read it you will wonder why that was not the remedy unlike what the Obama admin chose to do. JIM