Will the FHA Short Refinance Program help distressed homeowners avoid foreclosure?
From the same folks who brought you the Home Affordable Modification Program (HAMP) comes another tax payer funded attempt to prevent foreclosures by helping the banks.
FHA Short Refinance Program | What is it?
The FHA Short Refinance Program is an $14 billion FHA backed initiative designed to allow homeowners who are current on their mortgages but owe more than their house is worth the opportunity to refinance with an up to 10% reduction in principal in an FHA mortgage. Under the FHA Short Refinance, banks and other creditors that write down mortgages to less than the value of the property can essentially hand off the reduced loan to the government by allowing the homeowner to refinance into loans backed by the FHA. The purpose of allowing this loan is to prevent strategic defaults by homeowners looking to abandon homes in which their loan is current but they choose not to continue paying for an asset that is worth less than the mortgage. According to CoreLogig Inc., about 11 million borrowers, or 23% households with a mortgage, were underwater as of June 30, 2010.
FHA Short Refinance Program | The problem
The program has failed for several reasons. First, only non-FHA loans and non-Freddie & Fannie loans qualify. Freddie and Fannie, which own or guarantee half of the $10 trillion in U.S. first-mortgage debt, will not adjust principal on a loan modification so they aren't participating in the program. This void eliminates quite a few potential participants.
Second, how motivated are banks to refinance a performing note? If someone was paying you $1000.00/mo every month, why would you work to refinance and give to another lender?
Thirdly, there are consequences to the participating homeowner. The homeowner will have to pay transaction fees associated with the refinancing, and these fees can be difficult for a person struggling to pay their mortgage bill to come up with. Secondly, because they're getting an FHA loan, they will also be paying mortgage insurance. Finally, since this refinance includes debt forgiveness, the amount forgiven will be reported to the credit bureaus and impact the credit score.
FHA Short Refinance Program | So how's it working?
You remember a couple of weeks ago when HAMP was declared a failure? It was projected to help modify over 3 million loans but only modified roughly 500,000. The Obama Administration projected when the program started in September that up to 1.5 million households could refinance using this strategy. 6 months into the program, only 38 households have been able to refinance. If the goal was to make the HAMP fiasco look like a major success, then the FHA Short Refinance Program should hang a 'Mission Accomplished' sign on it's boat.
FHA Short Refinance Program | Final Opinion
Obviously the goal of the FHA Short Refinance Program is to take many of the potential default mortgages packaged and sold to Wall St. with shoddy paperwork, refinance, and create a new assignment of the mortgage in an effort to be able to avoid mortgage assignment fraud if the homeowner ever defaults and the servicers have to go through the foreclosure process. While the refinance may actually prevent a handful of people from defaulting on their mortgages, a 10% principal discount isn't going to help a person too much who is 20%-50% upside down and has to move, or has to sell due to an economic hardship. But with the tax payers footing the bill for the refinance, the FHA Short Refinance Program will greatly assist the banks when it comes time to foreclose on the property because there will be a clean assignment of title.

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