by Dan Krell © 2010
Beginning September 7th, a FHA program to assist “under water” home owners will be available as part of the multi-faceted approach under the Making Home Affordable program (which provides home owners relief opportunities). Many home owners who owe more than the value of their homes have eagerly awaited the announcement of the official start of the FHA “short refinance” program that was originally unveiled on March 26th of this year by HUD and the Department of the Treasury.
Somewhat akin to a short sale, the short refinance is a mortgage refinance when the home’s value is less than the existing mortgage principal balance. Much like the short sale, when the mortgage lender writes down the principal balance to allow the sale to occur, the short refinance depends on the existing mortgage lender to write down the existing loan balance to allow the refinance to be approved.
Although the home owner must qualify for a standard FHA refinance mortgage, other eligibility requirements for the short refinance program include (but are not limited to): the home owner must be in a negative equity position, must be current on the existing mortgage, and occupy the subject property as a primary residence; the existing loan must not be a FHA mortgage; the existing lien holder must write off at least 10% of the existing mortgage principal balance; and any subordinate loans that are not eliminated must subordinate to the new mortgage and cannot exceed a combined loan to value ratio of 115% (although the new FHA mortgage cannot exceed a loan to value ratio of 97.75%).
Home owners who obtained a loan modification may be eligible for this FHA refinance. If the loan modification was obtained through HAMP (Home Affordable Mortgage Program), the loan may be approved after the loan modification is made. If the loan modification is a non-HAMP loan, then the short refinance may be eligible after the home owner has made at least three on-time payments and the loan is current.
Since loss coverage for these loans will originate from funds made available from the Emergency Economic Stabilization Act of 2008 (EESA), the FHA short refinance mortgage program must comply with The Dodd-Frank Wall Street Reform and Consumer Protection Act (which became law July 21, 2010). Home owners applying for this refinance program must certify that they are eligible for the program and have not been convicted in the last ten years of (in connection with a mortgage or real estate transaction) felony, larceny, theft, fraud, forgery, money laundering, and/or tax evasion (SEC. 1481 (d)).
HUD is advising that home owners applying for this program should be counseled about the affects of the program on their credit history and score as well as consulting their tax advisors regarding the cancellation of debt and possible tax consequences.
Although HUD’s analysis predicts that between 500,000 and 1,500,000 home owners will take advantage of the program, critics have stated their doubts and point to the lackluster performance and high rates of recidivism from similar MHA and HAMP programs. Additional criticism on the short refinance program is that although lender involvement is voluntary, success of the program relies on the existing lenders’ participation.
Additional information on the FHA short refinance program can be obtained from the Making Home Affordable program (www.makinghomeaffordable.gov; 888-995-HOPE), as well as participating FHA lenders.
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 6, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.