TopMortgage Compliance Update (1)
August 9, 2010
FHA Launches "Underwater" Refinances

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Overview
On August 6, 2010, the Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2010-23, which announced the FHA Short Refinance program.

Available on September 7, 2010, the loan product will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth - or "underwater." The FHA Short Refinance will continue to be available until December 31, 2012.

The Federal Housing Administration (FHA) will offer certain non-FHA borrowers, who are current on their existing mortgage and whose lenders agree to write off at least ten (10%) percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

To be eligible for a new loan, homeowners must owe more on their mortgage than their home is worth and be current on their existing mortgage. Homeowners must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal to or greater than 500. The property must be the homeowner's primary residence.

The borrower's existing first lien holder must agree to write off at least 10% of the unpaid principal balance, bringing the borrower's combined loan-to-value ratio to no greater than 115%. The existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75%.

U.S. Department of Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishing of the liens. To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae, in its capacity as financial agent for the United States, on or before October 3, 2010.

HUD estimates that between 500,000 and 1,500,000 borrowers will refinance using these enhancements and the net economic benefits will be between $11.774 and $35.322 billion.

Highlights
Eligibility
Participation is voluntary and requires the consent of lien holders. In order for a loan to be eligible, the following conditions must be met:
  1. The homeowner must be in a negative equity position;
  2. The homeowner must be current on the existing mortgage to be refinanced;
  3. The homeowner must occupy the subject property (1-4 units) as their primary residence;
  4. The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a "FICO based" decision credit score greater than or equal to 500;
  5. The existing loan to be refinanced must not be a FHA-insured loan;
  6. The existing first lien holder must write off at least 10 percent of the unpaid principal balance;
  7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;
  8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;
  9. For loans that receive a "refer" risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner's total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;
  10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;
  11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and
  12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification as described below.
Salient Features of Program
  • Principal Write Off
  • Calculating Mortgage
  • Underwriting Requirements
  • Current Mortgage
  • Acceptable Credit History
  • Combined Loan-to-Value Ratio
  • Permissible Secondary Financing
  • Borrower Certification
  • Mortgage Type and ADP Codes
  • Second Lien Extinguishment and Servicer Incentive
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FHA Refinance of Borrowers in Negative Equity Positions
Mortgagee Letter 2010-23
August 6, 2010

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