FHA Short Refinance Program Helps Upside-Down Homeowners

Bills.com Team
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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.
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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.

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62 Comments

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  • AL
    Apr, 2013
    AZ
    I live in Arizona and have a conventional mortgage with BoA and a HLOC with Chase. Never late on payment and have good credit. Would I qualify for the FHA Short Refinance or PRA? If it turned out BoA does not participate in the FHA Short Refinance could I go else where?
    0 Votes

    • BA
      Apr, 2013
      Bill
      You can speak to another lender about the FHA Short Refinance program, however, the first lien holder, BoA, would need to agree to a Principal Reduction of at least 10% of the unpaid principal balance. Check with BoA to see if you are eligible for that program. You might want to see if you are eligible for other refinance programs, such as the HARP 2 refinance loan.
      0 Votes

  • NR
    Sep, 2012
    Nancy
    Confused! I had a person from American Certified contact me and state that I was eligible for a P.R.A. reduction. Of course they asked for $ to help with the paperwork. My mortgage is through Wells Fargo and is a FHA mortgage, Wells Fargo states if I am FHA that I do not qualify for a P.R.A. reduction. Mike from American Certified says Wells Fargo is not being honest. Can you tell me if FHA is participating in the P.R.A. reduction program?
    0 Votes

    • BA
      Sep, 2012
      Bill
      PRA is short for Principal Reduction Alternative, a HAMP-related plan promoted by the federal Dept. of Treasury and Dept. of Housing and Urban Development. According to the Making Home Affordable PRA Web page, more than 100 mortgage servicers participate in PRA, including Bank of America, CitiMortgage, JP Morgan Chase, and Wells Fargo.

      I see no bar to FHA-insured loans in PRA or HAMP. To the contrary, the FHA publishes a Web page discussing HAMP eligibility.

      Fannie Mae and Freddie Mac loans are not eligible for PRA.

      My advice? Talk to Wells Fargo again and ask if you qualify for PRA. Please return here and share what you learn.
      0 Votes

  • GW
    Aug, 2012
    Gregg
    I closed on my Chase mortgage in May 2009, but my mortgage was not acquired by Fannie Mae until Aug 2009 (missed HARP deadline) I am at 100% LTV right now on 200k, and do not want to pay PMI (don't pay now - have been in house for 17 years.)What are my options? - Have not been late on mortgage. Credit rating of 760+ (current mortgage is 20 yr - want to go to 30 yr with no pre-payment penalty to help with current economic downturn. Both of us are employed)
    0 Votes

    • BA
      Aug, 2012
      Bill
      I am not aware of any loan program that can meet your goals to refinance, given your LTV, desire to avoid PMI, and the fact that you do not meet the basic HARP requirements.
      0 Votes

    • LS
      Nov, 2012
      Lost Seattle
      Same as above except refi'd last year (Washington St). Decided to lower payments more by downsizing to a smaller house (didn't lie about anything on loan app and used the FHA owner occupied 203k loan...great credit and income) to lower my payments as I was told by multiple realtors that I could easily sell my house for what I owe on it with fees factored. Now, I'm supposed to move into my new house within 30 days b/c 203k remodel is done and also live there at least one year, but my current house isn't selling even with 20 people looking at it in the past 6 months. I don't want to go upside down selling my current house as money is tight b/c my income at my longtime job took a hit. I think if there were no fees it would sell if that matters. I cannot sell the new house or I'm a "flipper" I'm reading everywhere. I wonder if that is an option as it would seem to solve everything as I KNOW I can sell it and actually make money even though I only bought it 4 months ago. My intention was always to live there, but now I can't sell my current house for what I owe, so not sure if that makes it okay just to list it at a fair but profitable price and sell it right away. I would go $50k below Zillow or more and still make money. If it would make sense to goa certain route then I'm fine with my 780 credit score getting hit. 1. Selling new house okay even though I used the 3.5% down 203k loan which requires the 1 year occupation...or intent maybe only needed? 2. Foreclose old house b/c have primary and car, so no credit need? Seems excessive kind of to me tho. 3. Short/DIL, but why would they say okay when I'M the one that the bought the new house and put myself in this mess and I have $40k in my 401k too. Job income changed hardship I can argue and have lowered my price over and over to get more buyers looking. 4. Any type of refi that keeps the MI off the payment so I can use the lower rates. The savings are the MI payment so doesn't seem to make sense. Any advice would be appreciated. I'm hoping I can just sell the new house, but if somehow getting out of my current house is an option that would be a huge weight off my back.
      0 Votes

    • BA
      Dec, 2012
      Bill
      I suggest that you speak with your lender. The FHA recently extended the anti-flipper waiver rule. There are certain limitations on the type of transaction, including an arm's-length restriction. Check with the lender and see if you can sell the new house, even if you haven't lived there.
      0 Votes

  • DS
    Apr, 2012
    D
    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.
    0 Votes

    • DR
      May, 2012
      D
      Hi, I called Wells moments ago as they are my lender. They are now participating. Please call again.
      0 Votes

    • BA
      May, 2012
      Bill
      Did Wells Fargo indicate to you that they are willing to reduce your principal balance by at least 10%?
      0 Votes

    • RM
      Jun, 2012
      Rebecca
      I just got off the phone with them today and Wells says they are not participating. Why would they?
      0 Votes

  • VM
    Feb, 2012
    Victoria
    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?
    0 Votes

    • BA
      Feb, 2012
      Bill
      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.
      0 Votes