It seems the federal government is never short on ideas on how to head off the foreclosure crisis. Launched less than a year ago, the Federal Housing Administration’s "Short Refinance Program" is an alleged effort to help "responsible homeowners," who owe more on their mortgage than the value of their property, to refinance their loans.
The Federal Housing Administration will offer certain underwater non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.
To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth and be current on their existing mortgage. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner’s primary residence. And 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%.
In addition, 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. One catch in all this is that servicers must have executed a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.
This program, like many the federal government has already put in place, is long on hope and short on efficacy. After spending $50 Million (of the $8 Billion slated for the prorgram), a pathetic 246 borrowers have made it through the program. Do the math – that’s $203,252 per borrower. The program was supposed to have helped 500,000 to 1.5 Million borrowers. Well, that obviously is not going to happen.
One of the major hurdles to the program’s success is that Fannie Mae and Freddie Mac are not participants. Ironically, participating servicers must execute the SPA with Fannie Mae. It is as though the government doesn’t understand the often conflicting interests of investors and servicers. Follow the money. Without a realistic incentive structure in place, why would servicers or investors sign on? Well, not surprisingly, only about 24 servicers have signed on. So long as borrowers are current on their loans, most servicers and investors are not going to bother with a program like this.
It should not come as any surprise that our legislative leaders have been quick to put this one on the chopping block. Representative Robert Dold (R-Ill.) sponsored legislation to kill the program, but the bill is unlikely to reach the Senate floor. Rep. Dold said the program was well-intentioned but predictably doomed. He further noted, "It’s time for Washington to learn the same lesson instead of focusing only on prolifically inventing new programs and stubbornly persisting with them at all costs."
President Obama recently commented: "We are going back to the drawing board to put more pressure on banks to see if we can help more homeowners through modification and see where reducing principal is possible" Good luck with that. Well, fortunately, the debt ceiling will be raised here soon to help finance another knee-jerk program that no rightful lender, investor, or servicer would want to get wrapped up in.