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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 www.BabyBoomerLifeboat.com which is also an online portal to Websites containing valuable information and resources for Baby Boomers.
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