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FHA 'Short Refi' set to save underwater homeowners

by Broderick Perkins

(8/11/2010) ERATE Exclusive - The Federal Housing Administration (FHA) hopes to bail out more "underwater" homeowners with it's new Short Refinance program set to launch next month.

But there's a catch: Lenders who hold the first mortgage on the property must agree to write off at least 10 percent of a borrower's unpaid principal balance. Those who hold junior liens or second mortgages must also agree to forgive some, if not all, of the borrower's debt.

It other efforts to save underwater homeowners, those with mortgages larger than their home values, lenders have been reluctant to write off portions of unpaid balances. That's been especially true of second lien holders.

However, because the FHA's new refinance option will offer incentives to second lien holders, more of them are likely to go for the new deal.

"We're throwing a life line out to those families who are current on their mortgages and are experiencing financial hardships because property values in their communities have declined," said FHA Commissioner David Stevens.

The long-awaited FHA refi program, announced in March, is aimed at borrowers who are current on their mortgages, but have seen home values fall below what they owe, due to circumstances beyond their control.

Zillow this week said that the number underwater borrowers had fallen slightly in the second quarter, from 23.3 percent of the nation's mortgage borrowers to 21.5 percent. But that's small consolation to the millions of borrowers who are still upside down and have been unable to trade in their current loans for new ones because they have no equity in their homes.

Beginning Sept. 7 and lasting until the end of 2012, the FHA will offer to refinance an estimated 3 million to 4 million mortgages of homeowners who are not delinquent and whose lenders agree to write off some of what they are owed.

The program is voluntary and requires the consent of all lien holders. To smooth the way, the U.S. Treasury Department will provide cash incentives to junior lien holders, who stand to lose the most, whether the borrower goes into foreclosure or not.

Homeowners hoping to take advantage of the program should contact their lender to determine eligibility and learn if the lender will agree to write down a portion of unpaid mortgage balance.

Other Short Refi program details include:

• Your current loan cannot be insured by the FHA, which underwrites mortgages but does not originate them. Today, approximately 30 percent of all mortgages are FHA loans. Before the housing market bust the share was closer to 10 percent.

• You must be current on your mortgage payments, and the property must be your primary residence. Vacation homes and investment houses do not qualify.

• You must meet the FHA's standard underwriting requirements, which the FHA recently tightened, but remain more liberal than, say, private lenders. For example, you can have a credit score as low as 500 and still make the cut.

• Your primary lender must agree to write down the balance owed by at least 10 percent or a percentage that brings the combined loan-to-value ratio (including first and second mortgages) to no more than 115 percent.

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