FHA Details Refinancing Program Out Next Month
[Update 1: Adds date program begins]
US Department of Housing and Urban Development (HUD) secretary Shaun Donovan said details for a new "FHA Short Refinance" program would be announced this week, while speaking at the National Association of Real Estate Brokers (NAREB) conference in Fort Worth, Texas Tuesday.
According to a mortgagee letter sent out today, the new program would 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 on that first mortgage to no more than 115%. The existing refinanced loan cannot be an FHA-insured one.
Over the last 18 months, the Federal Housing Administration (FHA) has insured 30% of purchases and 20% of refinances in the housing market. During that time, FHA also helped 1.1m homeowners refinance and insured 1.4m mortgages. More than 80% of those were for first-time homebuyers.
Donovan said the refinance program will target the growing number of underwater borrowers, who owe more on their mortgage than their home is worth. According to Deutsche Bank, more than 14m borrowers were underwater as of Q110, but with a a further 10.9% decline expected on house prices, that number could grow to 20m by the end of 2011.
But Donovan said homeowner equity started to grow again in Q209 and has increased to date by "over a trillion dollars," which translates to close to $14,000 per household.
The Dodd-Frank bill provided $1bn to HUD and another $2bn to Treasury to help unemployed homeowners with their mortgages. Donovan said the market has responded by "increasingly concluding" that it is better to write down the value of underwater mortgages than incur the costs of foreclosure.
"By lowering barriers to principal write-down, the vast majority of the burden of writing down these loans will fall where it belongs: on lenders and investors, not on the taxpayer," Donovan said.
Market players have come out saying a government-induced refinancing wave is unlikely. Barclays Capital, Credit Suisse and JPMorgan Chase have each said such a program would require too many logistical hurdles and would deviate away from recent monetary policy.
Analysts at the investment bank Keefe, Bruyette & Woods (KBW) recently said if all borrowers refinanced into the current mortgage rates, roughly $350bn would transfer from Fannie Mae and Freddie Mac bondholders to borrowers, equaling $75bn annually.
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