patrick.net

http://bayarearealestatetrends.com/2010/08/fha-unveils-principal-reduction-strategy/

Now that the disappointing HAMP program is winding down, the time has come for the Government to try their next plan to save the housing market. Today, HUD unveiled the FHA Short Refi program, designed to refinance first-mortgages with a cooperating principal write-down from the existing lienholders.

This program has some real potential as well as some obvious shortcomings. Importantly, this could provide infrastructure for more aggressive principal write-downs in the future.

From HUD: FHA LAUNCHES SHORT REFI OPPORTUNITY FOR UNDERWATER HOMEOWNERS

In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable 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 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, the opportunity to qualify for a new FHA-insured mortgage. The FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.

“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. “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.”

Some details:

* The home must have negative equity
* The borrower must be current on their payments (though it isn’t clear about having late mortgage payments on your credit)
* The first lienholder must agree to write-down the loan by at least 10%
* The new first (FHA) loan Loan-to-Value cannot exceed 97.75%
* New combined Loan-to-Value cannot exceed 115%
* Homeowner must be current on their mortgage (and the bank can’t simply forgive the arrears to make them current)
* Primary residences only
* Borrower must qualify under FHA underwriting standards with a minimum FICO score of 500
* The short payoff to the first lienholder will serve as payment-n-full and the debt is then extinguished
* Permanent HAMP mods can apply
* Temporary/Trial HAMP mods cannot
* Any second-leinholders that agree to write-down their balance to achieve the max 115% LTV are eligible for a $500 bonus. :)

Why this could work

Banks can offload mortgages for 97.75% of the appraised value. With a foreclosure or a short sale, they aren’t going to get anywhere near that amount of money. Plus, the program requires borrowers to be current – meaning a lot of late homeowners are going to get caught up in order to apply.
Why it won’t

Banks will have no incentive to write-down performing loans and are under no pressure to grant them. They may choose to try this with high-risk option-arm and alt-a loans, where the default percentages are high. However, those borrowers won’t be interested – the only way they can afford the property is with gimmicky payments and FHA loans are conventional.

Besides, a lot of would-be defaulters would still walk away even at 115% LTV.
How this lays the groundwork for more aggressive principal reductions in the future

To make even a few of these Short Refi’s work, the FHA will need to build and perfect a system to coordinate and negotiate with the first lender, second lender, any other lenders, and the borrower. This system could be the mechanism for more forceful write-downs in the future.

The initial FHA Short Refi Progam will be a failure, with few successful refinances to report. Over time, the government will be forced to give more and more incentives to lenders to participate. Eventually, The Fed may end up reimbursing banks for a percentage of the principal reduction.

I still think bankruptcy cram-downs are a better idea, but this is the direction we’re headed.

One thing is for sure: expect more foreclosure delays as borrowers apply for FHA Short Refi's.

#housing