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Articles for Baby Boomers

FHA Short Refinance Program Misses the Target for Many

The new FHA Short Refinance program is intended to help homeowners who are upside-down on their mortgage. Unfortunately, it fails to deal with the realities of lender motives and will have little impact in stemming the tide of foreclosures, short sales, bankruptcies and strategic defaults.

The new FHA Short Refinance program that becomes effective in September 2010 is intended to help homeowners who are upside-down on their mortgage. That is, they owe more on their home than it is currently worth.


The Administration hopes this program will help three-to-four million homeowners to stay in their homes over the next few years. The basic ingredients of the FHA Short Refinance option are:

• The property must be the homeowner’s primary residence.

• The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500.

• Only “responsible” homeowners need apply – i.e., the homeowner must be current on mortgage payments.

• The borrower's existing first lien holder must agree to write off at least 10% of their unpaid principal balance, bringing that borrower's combined loan-to-value ratio to no greater than 115%.

• The existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

• To facilitate the refinancing of new FHA-insured loans under this program, the U.S. Department of Treasury will provide incentives ($500) to existing second lien holders who agree to full or partial extinguishment of the liens.

While well-intended, the program has several problems that are likely to limit its usefulness. First, if a borrower is current on his loan, how will the lender justify a principal reduction to the note holders? What is their incentive? Second, many properties have a second lien – why would the second lender agree to eat a principal reduction – and perhaps a large one at that – unless the property is in imminent danger of foreclosure? A $500 incentive?!!

In hardest-hit areas like California, Florida, Arizona and Nevada, many under-water properties have a second lien, legacies from the days when real estate values were soaring. So, if these people are current on their first and second liens, and remaining equity covers the first lien but not the second, why would the first lender agree to take a hit? Why would the second lender agree to eat thousands of dollars? The FHA Short refinance program will do little – if anything – to help this large group of homeowners who are prime candidates for strategic defaults.

One day, lenders will have to step up to the reality that the best way to revive the real estate market is to re-value properties at their current market worth. Otherwise, it will continue to be a long road of short sales, foreclosures, bankruptcies and strategic defaults...all of which accomplish the same thing, but in a much more painful, expensive and longer fashion. Perhaps the implementation of judicial cram-downs is ultimately the only way to instill sense in this whole mess.

About The Author

Al Kernek is a Internet marketing consultant, author and Baby Boomer. Learn more about issues facing Baby Boomers seeking to retire on a fixed or limited income at which is also an online portal to Websites containing valuable information and resources for Baby Boomers.


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