The Wall Street Journal

The FHA’s ‘Short Refinance’ Program:
Frequently Asked Questions

On Saturday, we looked at the newest efforts by the Obama administration to address the threat of foreclosures from borrowers who are underwater, or who owe more than their houses are worth.

If it works well, the program could deal with the risks of strategic default, from homeowners who could afford to make their payments but choose not to because they’re so far underwater. But the story noted how many of the knots that have snarled previous modification efforts—including dealing with second liens and contracts that govern mortgage securitizations—could also stymie the latest initiative.

Here are some answers to the most frequently asked questions:

Q: Who can participate?

Generally speaking, the program is designed for borrowers who are current on their loans and owe more than their properties are worth. Borrowers are refinancing into FHA-backed loans and must be able to meet all traditional underwriting guidelines (including a minimum credit score of 500 and an income that can support the current loan payments).

Loans already backed by the FHA can’t participate. Fannie and Freddie aren’t currently participating in the program, though it’s possible that they could decide to do so in the future. Fannie and Freddie currently have programs to allow borrowers to refinance loans for borrowers that are underwater, up to 125% of the property’s value. (This site allows you to find out if your loan is owned by Fannie or Freddie.)

Q: How does the program work?

If a borrower owes more than the property is currently worth, the bank or investor that owns the loan—and the company that services the loan (i.e., the company that collects monthly mortgage payments)—must agree to reduce the loan balance by at least 10% so that the new loan is no more than 97.75% of the home’s current value.

If they’re willing to take the loss, the borrower must agree to refinance into an FHA-backed loan at today’s interest rate.

Q: What costs could borrowers face?

Borrowers will have to pay transaction fees associated with refinancing. Because they’re getting an FHA-backed loan, they’ll also be paying mortgage insurance.

Q: Will participating in this program affect my credit score?

Yes. Lenders are forgiving some principal, which will be reported to credit bureaus.

Q: Can I use this program on an investment property or second home?

No. Borrowers must occupy the property. The FHA doesn’t finance second homes or investment properties.

Q: What if I have a second mortgage?

The combined mortgage debt on the first and second mortgages must be no greater than 115% of the property’s current value. The second-lien holder must agree to the refinance, and if the combined loan to value exceeds 115%, either the first- or second-lien holder (or both) will need to reduce the loan balance further. The government will make some incentive payments for second-lien holders that reduce principal.

Q: If my loan was modified by my bank, under HAMP or under a different program, can I participate in this program?

Maybe. If the modification was made under the Home Affordable Modification Program, or HAMP, the borrower is eligible one month after the HAMP modification is made permanent. If the modification wasn’t made through HAMP, the borrower must have made three monthly payments on time, and the modified mortgage must be current. If the loan is in a temporary or trial period, it isn’t eligible.

Q: What should I do if I think I’m eligible for the program?

Mortgage servicers—the companies that handle monthly payment collections—will ultimately decide whether borrowers can participate. Borrowers should talk to their mortgage servicers to see if they are eligible.

Because the program is voluntary, the investor that owns the loan will need to agree to the write-down. If there’s a second mortgage involved, then that creditor will also have to agree to participate. If the loan was bundled into a pool and sold to investors as mortgage-backed securities, then the servicer will have to decide whether to participate on behalf of the investors.

It’s also important to remember that because the program is new, servicers may be unfamiliar with it at first. While some servicers have hired lots of staff to deal with a crush of modifications and foreclosures, it could still be a while before banks are fully ready to refinance loans through the program.

If your bank says they’re not participating or that they don’t know about this program, you might refer them to some materials that have been issued to banks to help them become familiar with the program.

Q: How is this program different from HAMP?

The so-called “short refinance” initiative differs from other modification programs because it’s available only to borrowers who are current on their loans; so far, most modifications have extended help primarily to borrowers who are delinquent.