RHL Appraisals Network News Blog

Homeowners underwater on their mortgages could be getting relief through a government program designed to encourage principal write-downs for responsible borrowers, according to a Department of Housing and Urban Development news release issued Aug. 6.

In an effort to help responsible but struggling homeowners, HUD has detailed adjustments to its refinance program, which the agency hopes will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth.

Starting Sept. 7, the Federal Housing Administration will offer certain underwater non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least 10 percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage, according to the HUD news release.

"We're throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined," FHA Commissioner David H. Stevens said in the HUD news release. "This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product."

The FHA Short Refinance option is one of several Obama administration initiatives introduced as part of an administration plan to help stabilize residential markets by helping 3 to 4 million struggling homeowners through the end of 2012.

To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth, be current on their existing mortgage, qualify for the new loan under standard FHA underwriting requirements, have a credit score equal to or greater than 500, and the property must be their primary residence. Also, the borrower's existing first lien holder must agree to write off at least 10 percent of the borrower’s unpaid principal balance, bringing that borrower's combined loan-to-value ratio to no greater than 115 percent.

Existing FHA-insured loans cannot be refinanced, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

To facilitate the refinancing of new FHA-insured loans under this program, the Treasury Department will provide incentives to existing second lien holders who agree to provide principal write-downs. To be eligible for the program, servicers are required to execute a Servicer Participation Agreement with Fannie Mae on or before Oct. 3.

For more information on the FHA Short Refinance option, read the FHA's recent mortgagee letter.