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FHA Short Refinance Program Helps Upside-Down Homeowners

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HIGHLIGHTS
  • The FHA Short Refinance Program allows homeowners with negative equity to refinance.
  • The program slashes principal from mortgages on upside-down property.
  • Congress is threatening to remove funding for the program.

FHA Short Refinance Program Catching on With Lenders, Borrowers

Six months after the FHA announced its Short Refinance plan, it appears the program is developing traction among 23 lenders willing to follow its guidelines. The New York Times reported in mid March 2011 the following five lenders had restructured 44 loans:

  • Wall Street Mortgage Bankers, Lake Success, NY.
  • 1st Alliance Lending, East Hartford, CT
  • Nationstar Mortgage, Lewisville, TX
  • E Mortgage Management, Haddon Township, NJ
  • Glacier Bank, Kalispell, MT

The FHA has a complete list of FHA qualified lenders, although not all are participating the short refinance program. Notable non-participants in the FHA program are Bank of America, Citibank and JPMorgan Chase. The Times quoted a Bank of America spokesman, who said, "Without the participation of Fannie Mae and Freddie Mac, we don’t believe the program can help a significant number of our borrowers." Wells Fargo and Ally Financial (parent company of G.M.A.C. and Ditech), said they created test programs for the FHA option, and are studying the results.

The Times quoted a Citibank spokesperson who said the bank was “participating in a third-party pilot program along the same lines as the F.H.A. Short Refi program,” but did not provide details.

John Diiorio, the owner of 1st Alliance Lending, said big banks were taking part behind the scenes, by referring homeowners to third-party lenders that could restructure their mortgages. He said 1st Alliance had “several hundred FHA Short Refi” loans in the pipeline.

Because the FHA announced the program in September 2010, and because such loans take three to four months from start to finish, Diiorio said the number of refinanced loans should increase in coming months. He said that, on average, 1st Alliance had negotiated a principal reduction of $86,000 on a $256,000 loan, a 33.5% cut, to $170,000. He said lenders and investors had agreed to reduce principal for only half of the loans 1st Alliance Lending worked on. Diiorio said borrowers pay a slightly higher fixed rate, typically 6% or so, but the financial impact was the same as a 5% rate on a higher-balance loan.

HUD estimated that 500,000 to 1.5 million borrowers could be eligible for the program. Even so, it faces challenges in Congress. In early March 2011 the House of Representatives voted to end it.

Bills.com’s Take on the FHA Short Refinance Program

Under the FHA Short Refinance program, a lender reduces the principal balance on the mortgage. The reduced-balance loan then passes from the private hands of the lender or investor that owns the loan to a loan that is guaranteed by the federal government. Previous government programs attempted to aid those who are behind on their mortgage payments. The FHA Short Refinance Program is targeted to borrowers who are current and can afford their payments, borrowers who could not qualify for the different loan modification programs available.

If you are upside-down or underwater on your mortgage and want to refinance, the FHA Short Refinance Program is a great way to knock-down your principal and pay less in your monthly mortgage payments. Congress is considering cutting the program, so if Fannie Mae or Freddie Mac are not your mortgage investor, call your mortgage servicer to learn if it is participating in the FHA Short Refinance Program. Or, contact one of the lenders mentioned at the top of this article.

Comments (52)


D S.
Orlando, FL  |  April 20, 2012
Just got off the phone with Wells Fargo. They told me they are NOT participating in the FHA Short Refinance Program. I told them very plainly that if they don't help me re-negotiate my loan I will be pursuing strategic foreclosure. They told me there was nothing they could do to help me. The property in question is a condo in Orlando bought in 2006 for $250,000, now valued at ~$100,000. Balance on mortgage is ~$200,000.
Avatar
D R.
Oakland, CA  |  May 15, 2012
Hi, I called Wells moments ago as they are my lender. They are now participating. Please call again.
Bills.com
May 16, 2012
Did Wells Fargo indicate to you that they are willing to reduce your principal balance by at least 10%?
Victoria M.
Boston, MA  |  February 22, 2012
I am hoping you get to answer these questions... My House has been on the Market for almost 8 Months now as a Short Sale. I tried to refinance Multiple times without any luck through my current lender "Citi". I have a 6.5% Interest rate on a $340K Home. I have just been given an extension until June 12th to sell the house or except a DIL. My Grandmother also is a signer on my mortgage. However this is not and has never been her primary residence. How can I get her off of the Deed so I stop hurting her credit. Also would they be able to go after her primary residence since it is paid off? With the New Obama changes to the mortgage industry; What could I do to keep my house? I am unable to pay my Monthly mortgage of almost $3k per month without lowering my monthly payment. Any Suggestions?
Bills.com
February 22, 2012
It is your grandmother's presence on the mortgage loan that is hurting her credit. It also makes her financially responsible for the debt. Depending on the anti-deficiency laws in your state, you and she could be on the hook for any balance that remains on the debt after the house is sold. It also depends on what you work out with the lender, as the lender can forgive the deficiency balance.

How her home would be affected also depends on the homestead exemption that exists in the state where her home is located.

The Obama refinance plan is only a proposal, at this point, so it does not offer a solution to keeping your home. Did you try working with your lender to modify your loan or see of you qualify for the HAMP program? That seems to be one route to investigate.
Crytstal R.
Town Of Glenville, NY  |  February 12, 2012
Well thats just great I have a FHA and again no help, as citimorgageis not participating, no suprise why should they when the governments just going to hand them my morgage balance when I default.
M E.
San Antonio, TX  |  February 09, 2012
We have a mortgage with Wells Fargo and have more than enough income to cover our payments. Problem - we missed 2 payments a while back and they filed foreclosure proceedings. Been trying to work it out with them - they asked for a downpayment for the remod which I happily sent thinking that would be the end of it and we'd get back to normal. Nope. They cashed the moneyorder but didn't apply it anywhere to benefit us. Every time it goes to the underwriters it gets shifted to a different department and the process started over, and now this last underwriters (after over a year of hell) and they are now asking for a "guarantee of income letter for the next 3 years." Who the heck has that kind of security? And now we have a sale date of less than one month away now. I am sick over this - literally. I can honestly say I never want to own a home again. I'm going to buy one of those big RVs outright and move it to where ever I want to be! This is stupid. I will never ever deal with Wells Fargo again.
Bills.com
February 12, 2012
If you have had payments made that are not accountable for, and you are in foreclosure, then you should consider speaking to a lawyer, who can verify that the procedure has been done correctly.
Angry U.
Norristown Boroug, PA  |  January 22, 2012
JPMORTGAGE CHASE NOT PARTICIPATING...big surprise...why would they do anything to help borrowers who are stuck in ARM lower their payments? Why would our loan officer tell us that "Refinance appraisals always come back lower" than a new purchase appraisal...of course they do...why would the bank who owns the loan happily accept LESS money from its customers? DO NOT USE CHASE...DO NOT USE BoFA....do not trust your realtor...do not trust your lender...they only see dollar signs when they see your pearly whites smiling at your dream home!
Earl S.
December 24, 2011
Hello, we currently owe 146k on a townhome with a market value of 88k. Our mortgage is now owned by Boa and I have been reading that they don't participate in the short refi program. Are the any options we have? Is this true about Boa? What should we do?
Bills.com
December 25, 2011
The Bank of America participates in a number of Making Home Affordable programs, including HAMP and HARP. Some of these programs require the loan being guaranteed by Fannie Mae or Freddie Mac. I recommend that you read about the Bank of America short sell programs on their website page Bank of America loan assistance programs.The Bank of America does have government based short sale programs, as well as traditional short sale programs.

Before doing a short sale, I recommend that you consider all your options, and especially what will happen with the deficiency balance. For more information read Bills.com article about short sales.
Lauratina L.
West Monroe, LA  |  December 05, 2011
My husband died two years ago and the house was bought before we were married. I have been keeping up with the payments but with extreme hardship. The Value is 50,000 less than the appraised value. Would this program work with my name not on the title? Has anyone had this problem?
Bills.com
December 05, 2011
Common law, which is what most US state law is based on, has been dealing with real property issues for 300 years, so it is safe to assume there are no new or unique issues in real property. My words here are meant as a comfort, and a local lawyer who has experience in real property law will be able to advise you precisely.

First, if you have not done so already, probate the decedent's estate. Doing so will clarify the title issue.

Second, property's title is a separate issue from the home loan. Your name could be alone on the title, and the decedent's name could be on the mortgage with yours as a joint borrower, or the opposite could be true. You do not mention if your name is on the home loan as a joint borrower. If so, then you may apply for a mortgage modification. If your name is not mentioned on the home loan, then you will need to qualify for a mortgage.

My advice? Consult with a lawyer who has real property or probate experience. A few minutes with a lawyer will help you map out a course of action.
Crystal R.
Town Of Glenville, NY  |  October 27, 2011
The bank (lawyers) have asked for the stay to be lifted off the house and considering it was never included in the bankrupcy, only as a loan owed, they are only recieving payments on what was behind at the time of filing.My bankruptcy lawyers have agreed to lift the stay, this is where the pay up in 6 month or forclosure
Crystal R.
Town Of Glenville, NY  |  October 27, 2011
I don't understand citibank We have been trying to modify our loan since 2009 when we were worried our jobs would end, we were told we were current and didn't quality. In 2010 when we did become unemployed and fell behind, they kept losing my modification applications. Then when we filed chapter 13 , they mysteriously lost our app again, finally in november 2010 they sent a modifacation @ the same interest rate and tacked on all the past due amounts and fees, causing my morgage payment to go up. I have recently learned that the house is underwater by 100thousand, and through the lawyers they still will not budge. They are giving me 6 months to catch up and get current or they are forclosing. WHY WON'T THEY LISTEN!!!! We are finally working but @ a considerable less income and current payments are well over 50% of our income..
Bills.com
October 27, 2011
Your statement, "Then when we filed chapter 13..." gives me pause. Consult with your bankruptcy lawyer about Citibank's behavior, and if it is in compliance with what the bankruptcy court's orders.
Katrine B.
Orlando, FL  |  October 25, 2011
I own a condo in Orlando, FL that I bought for $209,000 in 2007. It is currently valued at around $80,000, which is a HUGE hit. It's a really nice place. Problem is, I got a job in Portland, OR, so now I'm renting out the condo as well as renting a place in Oregon. My mortgage company is requiring me to refinance, but my mortgage amount is way more than what it's worth, so I feel stuck. I don't qualify for a short sale because I don't have financial hardship. Would I qualify for the FHA Short Refinance program?
Bills.com
October 26, 2011
I do not understand your statement, "My mortgage company is requiring me to refinance..." No one can force a homeowner to refinance a home loan. If you feel your mortgage servicer is coercing you, by all means consult with a lawyer who has real property or contracts experience to assist you in these negotiations.

If the servicer will not offer you a short sale, then consider a strategic default.
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