The "FHA Short Refinance" program recently detailed by the Federal Housing Administration
(FHA) and the US Department of Housing and Urban Development
(HUD) is likely to have only a moderate impact on the mortgage market, according to a research note today by Keefe, Bruyette & Woods
The program -- which essentially requires the approval of mortgage holders for principal forgiveness -- is also likely to have a minimal impact on private-label mortgage-backed securities (MBS) and even less of an impact on agency MBS.
As HousingWire reported last week
, the new program will provide additional refinancing options to underwater homeowners starting Sept. 7. To be eligible for the new loan, the homeowner must be underwater but still current on the mortgage. A credit score of 500 or better is required, and once refinanced and insured by the FHA. The new refinanced loan must have a loan-to-value ratio of no more than 97.75%
The borrower's existing first-lien holder must agree to write at least 10% of the unpaid principal balance, and it must bring the borrower's combined loan-to-value ratio (LTV) on that first mortgage to no more than 115%. The existing refinanced loan cannot be an FHA-insured one.
KBW said the FHA refi program is unlikely to have "any meaningful impact" on agency MBS, because only 8% of Freddie Mac
and 14% of Fannie Mae
mortgages have LTVs in excess of 100%. Additionally, the firm noted the Treasury Department
has said the government would not consider allowing the GSEs to write-down underwater mortgages.
KBW noted the program could impact very high LTV loans in the non-agency or private market if default is imminent for borrowers deeply underwater. The lender may choose to write down principal in cases where potential loss would be lower than the loss in the market based on expected loss severities. On the other hand, borrowers with moderate negative equity and LTVs lower than 115% are less likely to walk away from their homes, and by extension are less likely to need the FHA refi program.
The presence of second liens will hinder implementation of the program, as available incentives under the program may not defray lender costs enough to encourage participation.
"[I]n many cases the lender might be better off earning the interest on its loan until it goes delinquent," KBW said. "Further, since a large percentage of second liens are held in portfolio at banks, they are marked at cost which makes any write-down difficult."
Write to Diana Golobay