Problem with New FHA Short Refinance Program

There’s a few major problems in the new FHA Short Payoff  refinance that has been added to the “Making Home Affordable” family of solutions.  I’ll later take the time to write the full details of this issue, but I need to get this message out over the next couple of days.

The new FHA program includes new FHA guidelines that no longer allow an unlimited Combined-Loan-To-Value on FHA loans.  This is a HUGE problem.  Let me explain.

In the past, FHA didn’t cap how much a homeowner owed on their house if the homeowner wanted to refinance the first mortgage as long as the new loan was within the 97.15%-97.75% of the home value.  For instance, let’s assume a home buyer bought a $200k home with 20% down and ended with a $160k mortgage.  The house appreciated to a value of $220k and the homeowner took a home equity loan of $50k for home improvements, making their new combined loan amounts $210k.  Then the market declined and the new value is $170k, making the homeowner underwater on their home loans by $40k.

FHA would still allow this homeowner to refinance the first mortgage even though the second mortgage brought the home value to over 100% since paying off the $160k still had was within the 97.75% FHA limit.

$170k appraised value x 97.75% FHA LTV limit= $166,175…enough to pay off the $160k first mortgage owed.

The homeowner would still have their equity loan but this gives them an option to refinance their first mortgage, which may have a high rate or may be an adjustable rate mortgage set to adjust soon.  The new FHA guidelines will not allow the value of the two loans exceed 100% UNLESS the 2nd mortgage company is willing to write down the balance.

Short payoff refinances  sound good, but lenders often don’t want to take less than what’s owed.  The old FHA guidelines actually helps more homeowners because more homeowners have 2nd mortgages where a short payoffs wouldn’t be considered.  In fact, current FHA guidelines DO NOT PROHIBIT SHORT PAYOFFS so the new guidelines are only stricter than the old guides!  How is this supposed to HELP homeowners?  The guidelines are tigher and it’s now a part of the Making Home Affordable program?  I’m still scratching my head on this one.

To stay on track, there is a VERY important message I need to get sent to every homeowner in America with a second mortgage.  APPLY FOR A FHA LOAN AND GET A CASE NUMBER ORDERED NOW!  Why?  FHA will allow you to close under old or new guidelines if your case # was ordered before the deadline for the guideline changes.  Right now, that date is September 7th, 2010, less than one week away!  Even if you don’t qualify for a loan right now, credit is too low, equity is less than 97.75% right now, STILL GET YOUR CASE #.  By ordering it now, you can always revisit this option in case your credit is improved or equity position has improved down the road.  FHA doesn’t cancel case #’s and consumers who have a case # ordered are grandfathered into the old guidelines.  This allows above 100% combined loan-to-value and still allows you to explore the short payoff options that are available. 

If you talk to the right lender, you should be able to get this done in one day and for free.  Again, all homeowners who have 2nd mortgages and may consider refinancing at some point, please get a FHA case # ordered in the next couple of days.  Details can be read on this announcement letter from FHA:

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-23ml.pdf

14 comments to Problem with New FHA Short Refinance Program
  • Dan Lewan

    New FHA short sale re-finace did not work…I was approved for a FHA Loan….HFC/HSBC would not participate….I owe them approx. $270,000 the appraisal came back at $172,000…

    I have a 10% interest rate on a home that is $98,000 underwater…Reason for the decline they stated I can afford the payment’s….This is not the fact….I have no savings living paycheck to paycheck…

    The sad part about all this is I don’t even mind paying on all the lost equity but not at 10%….I have had the home for over 9 years….I have already paid them in interest more than the home is worth…And since they refinaced the mortgage over 3 years ago I owe them more than I borrowed…

    They have closed there branches and will not loan or re-write mortgages…They will not participate in any of the government programs…They are fine with a deed in leiu…

  • Dan,

    What consumers are not being told is that their current lenders must approve a lesser amount to be paid off. There’s government incentives for the lenders to take the lesser amount, but from what I could gather, it’s still a huge write-off for them.

    This creates a problem. How do you convince your current lender that you’re in hardship and they need to take less? As most people know, the easiest way to get their attention is to go late, but once you’re late on your mortgage, you’re not going to qualify for a FHA loan anymore.

  • NOLA

    WHAT IS THE ALTERNATIVE FOR THE LENDERS. EITHER APPROVE THE SHORT REFI OR THE BORROWERS FILL FOR BANKRUPTCY.
    IF THE SHORT REFI APPROVES THE LENDERS WILL STILL MAKE MONEY, THERE IS A HUGE MARKET FOR TOXIC ASSETS AND IF THE BORROWERS FILL FOR BANKRUPTCY THE LENDERS LOOSE BIG BETWEEN LAWYERS FEES AND OTHER LEGAL STUFFS THE LENDERS WILL LOOSE ALMOST 90% AND ON TOP OF THAT THE NEIGHBORHOOD GOES BELLY DOWN AND THE NEXT HOUSE WHO HAS THE SAME LENDER FILL FOR BANKRUPTCY TOO AND THE NEXT AND THE NEXT…..

    WHO LOOSES….

  • Nola,

    It depends from scenario to scenario. I personally think it has merit but the procedures to get lenders to except lower payoffs has been established through short sales, which is “We don’t pay attention until you’re late”. This is a problem because once they’re in default, they no longer qualify for the refinance.

    It’s not the staff’s fault. I don’t think there’s actually a written policy that states you must be late, but these departments are overworked and understaffed. They simply can’t take the time to help the homeowners who are currently on time.

    There is supposed to be an “incentive” for the lender taking the short-payoff but it’s obviously not enough. If it were more, lenders would be more willing to consider taking a reduced payoff.

  • Robert

    Is a short pay refinance the same as a short sale for tax purposes? Wouldn’t the difference between the amount owed and the new amount refinanced be considered as income to the IRS?

  • Robert,

    That’s a great question. It may be considered income, but we need a tax expert here to answer that one. My hunch would be yes but I’m not qualified to answer that question.

  • Cecilia

    I am trying to get my lender to accept a short refi where I maintain ownership. I have a hard money lender who is willing to refinance me. My lender is Bank of America. They hold the first mortgage and I do not have a second mortgage. Bank of America told me that federal guidelines do not allow them to do it because they cannot allow the seller to benefit from the transaction. Here you have written that new FHA rules do not prohibit short payoffs. Where can I find these rules so that I can make this case to Bank of America myself?

  • Keane

    Cecilia,

    Here’s FHA’s mortgagee letter allowing short refinances

    http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-23ml.pdf

  • Cecilia

    I am afraid that my property is an investment property. The document you gave me applies only to residences in which the homeowner resides. Can you fish up any other supporting documentation? Thank you so much!

  • Cecilia,

    FHA only finances owner-occupied loans. You should look to see if you can do a HARP refinance.

    http://www.keaneloans.com/2010/07/01/harp-loans-perfect-for-investment-properties/

  • Dave

    Keane,

    I read your article and the comments. I’d like to describe our situation and get your comments.

    Our lender did our refi 555k when our home was worth 760k. Our home is now worth 360k. We would like to do a short payoff. We have 15k in total savings and our annual income has taken a hit with the recession. We gross around 60k a year. Our HUD counselor told us that we are a perfect candidate for a short pay off because we do not have a second and our lender, ING, holds our paper. We also have a sound budget. We talked to our lender, they had not heard of a short pay-off but they DO accept short sales. They do not participate in ANY government programs. Finally, we are current on our loan and we both have 800 credit scores.

    In your opinion, does a short pay off make any sense from our lenders perspective? Do they have to “participate” in this government program or do they just cash a check for the homes current value? It looks to me like the new bank is the only one participating in the program, right?

    Seems like ING should be receptive to this because our counselor has made it pretty clear to us, and to ING that we are not in a position to keep up with our current loan as our savings are dwindling and we have little choice but to short sale or default if the ING does not accept our short sale. Seems like a short pay off saves everyone money, so what am I missing?

    Dave

  • Keane

    Dave,

    Successful short refinances are far and few in between but its always worth trying. The difficulty to overcome is negotiating a short payoff on the refinance without a default. Most lenders will not discuss a short payoff until you’re late. If you’re late on your mortgage, you will not be eligible for the refinance. It’s often a catch 22.

    Finding a lender who will close the loan isn’t difficult. Negotiating the short payoff is the road block.

  • Cecilia

    Dear Keane,

    I need to remove all of my posts as they show up on google and they contain private information. Can you please do this for me?

    Thank you,

    Cecilia

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