FHA program to help underwater borrowers quietly stumbles
[Update 1: Adds HUD commentary on GSEs]
An $8 billion program launched by the Federal Housing Administration in September to help underwater borrowers refinance into a new mortgage has quietly sputtered out of the gate.
The FHA Short Refi program was initially expected to reach between 500,000 and 1.5 million borrowers, according to a letter sent to lenders when the program was announced. Analysts were more pessimistic. More than $50 million has already been spent, but according to the Department of Housing and Urban Development, only 246 borrowers made it through the program so far.
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.
According to the program's data through April, the latest numbers made available to HousingWire, 18 lenders participate in the program. At that point, only 149 new refinances had been made. A HUD spokesman clarified the recent numbers show 246 new loans from 24 lenders.
Through April, the leading lender to provide these new refinances was Nationstar Mortgage at 93. The next closest was 1st Alliance Lending at 12, followed by Wells Fargo ($40.24 0.23%), which conducted 11 refinances through the program.
Most of the borrowers that did make it through the program reside in California. Nearly one-third of Nationstar's FHA Short Refi loans backed homes in the Golden State. And nine of Wells' 11 were also located there.
Why it's so low
The main hurdle to the program is that Fannie Mae and Freddie Mac are not participating. Because a large portion of the major lenders' servicing portfolios are made up of these loans, these companies have only run pilot programs to test how the program would work for their own portfolio, according to several sources.
"As with any new mortgage program, the lenders and servicers need ample time to build the necessary infrastructure to facilitate the program. This infrastructure includes technology, systems, product training and borrower outreach. These initiatives take significant time and money to complete," a HUD spokesman told HousingWire.
The FHA Short Refi program also requires the borrower to become current through modification before becoming eligible.
"For borrowers who are not delinquent, servicers and investors have taken a cautious approach given their economic opinion on whether or not it’s beneficial to forgive principal. Given the voluntary nature of the program, the investors will only forgive principal if they feel it’s economically in their best interest," HUD said.
Without the participation of the government-sponsored enterprises, the pool of eligible mortgages was reduced by two-thirds.
"We are encouraging GSE participation and in the mean time we are working diligently to engage the remaining one-third and are starting to see the ball get rolling," the HUD spokesman said.
Efforts to end
In March, the House of Representatives voted to end the FHA Short Refi program through legislation sponsored by Rep. Robert Dold (R-Ill.). A slew of other bills ending the Home Affordable Modification Program, the Emergency Homeowner Loan Program and the last leg of the Neighborhood Stabilization Program also passed the House that month, though none are expected to reach the Senate floor.
In a statement sent to HousingWire, Rep. Dold said the program was well-intentioned but predictably doomed.
"Small business owners quickly learn to stop doing things that clearly aren’t working and to re-allocate resources to the most efficient and effective uses," Dold said. "It’s time for Washington to learn the same lesson instead of focusing only on prolifically inventing new programs and stubbornly persisting with them at all costs."
National home prices have fallen nearly 33% from their peak before the crisis, pushing almost one-third of all mortgages into negative equity — the most prominent red flag for strategic default, according to Lender Processing Services ($32.99 0.11%).
So far, servicers and the government-sponsored enterprises have been unwilling to promote more widespread principal reductions. President Obama said this week his administration will put more pressure on banks to solve the problem.
"We are going back to the drawing board to put more pressure on banks to see if we can help more homeowners through modification and see where reducing principal is possible," Obama said.
Write to Jon Prior.
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