Several Factors Could Limit Reach of FHA Short Refi Program
Secondary limitations on servicers that will participate in the recently announced Federal Housing Administration (FHA) Short Refinancing program could limit the amount of mortgages that receive the write-down. In particular, Credit Suisse analysts noted today that the program will be limited in its reach among mortgages owned or guaranteed by government-sponsored enterprises (GSEs). The program, announced by the US Department of Housing and Urban Development (HUD) last week, would provide additional refinancing options to underwater homeowners starting Sept. 7. According to HUD, to be eligible for the new loan through the program, 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 on the new loan plus any junior mortgages to no more than 115%. So, in order to qualify, the borrower must be underwater but still making current monthly payments. But in order for a servicer to write the mortgage down, it has to achieve "safe harbor" with the investor in order to avoid future litigation. This means proving the borrower is in imminent default. A spokesperson for the Mortgage Bankers Association (MBA) confirmed this to HousingWire but could not provide an estimate on the amount of loans that would be eligible for the program. JPMorgan analysts said 1.1m mortgages could be eligible for the program but admitted there would be difficulties in accurately predicting which loans should get the write down. Other analysts are predicting low numbers of eligible borrowers. Amherst Securities said "relatively few" would be eligible due to debt-to-income restraints and the fact that it’s a volunteer program. Loans backed by the GSEs Fannie Mae and Freddie Mac are "unlikely" to be written down through the recently announced FHA Short Refinancing program, according to a report from Credit Suisse. "First, refinancing a GSE loan into FHA does not reduce risk to the government," according to the report. "On the contrary, it potentially creates incremental losses from the upfront principal write-down on refinanced mortgages, some of which might not default under the status quo." Also, Credit Suisse analysts believe the GSEs would prefer retaining control of the loans, and, according to them, Fannie and Freddie do not use principal write-down as part of the loss mitigation waterfall, and would likely not participate in the program. Fannie Mae did not have a comment, and Freddie Mac did not immediately respond to requests for one. Non-agency loans will "likely be limited," too, according to the report, and the program already prohibits FHA-backed loans. According to Credit Suisse, 7% of outstanding non-agency loans would qualify. Despite more administrative problems due to restricted coordination between first and second-lien holders, Credit Suisse analysts believe the program stands a better chance of success in the whole-loan space. Write to Jon Prior.