The amount of mortgage loans eligible for the new Federal Housing Administration
(FHA) Short Refinance program will be "relatively few," given debt-to-income restraints and that it's a volunteer program, according to Amherst Securities Group
Last week, the US Department of Housing and Urban Development
(HUD) announced the new program
would provide additional refinancing options to underwater homeowners starting Sept. 7. JPMorgan
analysts estimated that 1.1m mortgages could be eligible for the program, but Amherst doesn't believe as many will actually make it through the process.
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 to no more than 115%. The existing refinanced loan cannot be an FHA-insured one.
But in order for the servicer to avoid litigation from investors for the write-down, or achieve safe harbor, they must prove the loan is in imminent default. Few servicers would be willing to label a consistently current borrower as in danger of default and needs to have the principal written down, according to Amherst.
"The true use of this program will be for loans that were once delinquent, and have been modified," according to Amherst.
Amherst expects a 20% re-default rate on permanently modified mortgages under the Home Affordable Modification Program (HAMP). That would leave 104,000 permanent modifications that are back into the default and foreclosure process, and 416,000 permanent modifications that actually keep the homeowner in the home.
For borrowers attempting to get a refinance on a modified mortgage, the new loans under the FHA Short Refinance program can close one month after it was converted into a permanent modification. If it was modified under another program, it must be current.
"This suggests that the FHA delinquency criteria have been removed for these modified loans, but that back-end DTI [debt-to-income ratio] constraints remain," according to the report.
Servicers must reduce a mortgage to a 31% monthly debt-to-income ratio for the loan to permanently modify it. The back-end DTI is the ratio checked again at the end of the trial modification process. The median back-end DTI was 80% before the modification and 65% after it, according to the June HAMP report.
The constraints come because of the second loan issued by the FHA as part of its new program. Those are issued at a market interest rate, so when they go up, additional write-downs could be needed. For example, if a $200,000 loan at a 2% interest rate has a $739 per-month payment, it must be written down to $130,000 when the rate goes up to 5.5%, according to Amherst.
Loans on bank balance sheets and being "worked out" by special servicers are more likely to go through the FHA Short Refi program than those with Fannie Mae
or Freddie Mac
"While we like the idea of re-equifying the borrower, we are concerned about how many borrowers will actually qualify," according to Amherst.
Write to Jon Prior