The Federal Housing Administration
(FHA) will begin offering new government-insured mortgages to rescue underwater borrowers today, but the new Short Refinancing program may face as many limitations as earlier programs designed to aid the still sputtering housing market.
The U.S. Department of Housing and Urban Development
(HUD) announced the FHA Short Refinancing program in August
, which was set to launch Sept. 7. The Treasury Department
set aside $14 billion in Troubled Asset Relief Program (TARP) funds. The money will encourage mortgage servicers to support write-downs of second mortgages and to provide coverage for a share of potential losses on these new loans, according to HUD.
The combination of TARP dollars and the FHA insurance means the new lenders will have a loan backed by the U.S. for up to 97.75% of the home value.
Under the program, eligible borrowers can receive an FHA-insured loan if the lender or investor writes off the unpaid principal balance of the original first-lien by at least 10%.
To be eligible for the new loan, the homeowner must be underwater but still current on the mortgage, which cannot be already insured by the FHA. A credit score of 500 or better is required. The new refinanced loan must have a loan-to-value ratio of no more than 97.75%.
After receiving the new refinancing through the program, the borrower's combined loan-to-value ratio on the re-subordinated mortgages cannot exceed 115%. The new FHA mortgage can only be used to refinance the unpaid principal balance on the first lien.
One of the first hurdles the program faces is the servicer's ability to achieve "safe harbor" with investors. In order for a servicer to write the mortgage down, the servicer must prove imminent default in order to avoid future litigation from those investors. This would likely limit the amount loans eligible for the program.
More restraints come from a likely lack of participation from the government-sponsored enterprises (GSEs), according to a report from Credit Suisse
in August. The program would not reduce the risk already held by the government's involvement in Fannie Mae
and Freddie Mac
According to Keefe, Bruyette & Woods
(KBW), Treasury has not cleared the GSEs
to write-down underwater loans.
Other analysts have also said the program would only have a minimal effect. JPMorgan
analysts said 1.1 million mortgages could be eligible for the program but admitted there would be difficulties in accurately predicting which loans should get the write down. Amherst Securities Group
said there would be "relatively few"
eligible for the program, too.
Further restrictions from HUD would still reduce the number of eligible loans. Mortgages modified under the Home Affordable Modification Program (HAMP) and other proprietary programs are still eligible, but the 1.5 million loans still in HAMP trials are not eligible for the FHA Short Refinancing program.
HAMP, another program launched in March 2009 by the Obama Administration, has been deemed "a failure" by many analysts, including Amherst. Servicers have completed nearly 435,000 permanent modifications through HAMP
, still far from the 3 million to 4 million goal originally set for the program.
The Home Affordable Refinancing Program (HARP), the government's first attempt to induce refinancing, underwhelmed as well
And while the first-time homebuyer tax credit did prop up the market before it expired in April 2010, home sales have plummeted since
, leading some to believe the tax credit merely pulled demand
from the fall and winter forward.
And while the amount of homeowners who owe more on their property than its worth, those targeted by this latest effort, did decline in the second quarter of 2010, there are still more than 11 million properties considered underwater
, according to the latest data from CoreLogic
With property values still shrinking, the reason behind the reduction in underwater homes were increased foreclosures, a result that should continue to outnumber any government program's statistics.
"Negative equity continues to both drive foreclosures and impede the housing market recovery. With nearly 5 million borrowers currently in severe negative equity, defaults will remain at a high level for an extended period of time," said Mark Fleming, chief economist with CoreLogic.
Write to Jon Prior