Mixed reviews for new FHA refinance program for underwater owners

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The government will launch a refinance program next month that targets homeowners who are under water on their mortgage but have not missed a monthly payment.

The Federal Housing Authority (FHA) Short Refinance option is aimed at helping responsible homeowners who owe more on their mortgage than their house is worth because their local markets saw large declines in home values.

Starting Sept. 7, FHA will offer the opportunity to refinance to certain non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least 10 percent of the unpaid balance of the first mortgage. The new mortgages would then be FHA-insured.

The borrower must have a credit score of at least 500 and the house must be the homeowner's primary residence.

In addition, the refinanced first mortgage must have a maximum loan-to-value of 97.75 percent. That means if the home is valued at $200,000, the refinanced loan cannot exceed $195,000, including payoff to the current lender and any finance charges.

Some lenders give kudos to the government attempting to help families, while others fear the program is destined to fall well short of its well-intentioned goal.

"It's too early to tell," Dennis Black of US Lending Co. in Redding, Calif., said. "I applaud the government for continuing to come up with programs.

"They bailed out the banks, they bailed out the auto dealers. Can they bail out homeowners and keep them in their homes? It's too early to tell."

But others wonder what the lender has to gain by writing down a balance for somebody who is making his monthly mortgage payment?

Banks are more willing to negotiate with borrowers who might be months behind on their mortgage. Many won't even think about writing down balances or modifying loans unless the borrower is a potential foreclosure risk, experts say.

FHA Commissioner David Stevens said the government is "throwing a lifeline" to families, giving homeowners and lenders another tool to battle the problem of negative equity facing borrowers current on their mortgage.

But the government is taking away tools that lenders previously had, not adding them, said Ken Lawrence of California mortgage company Silverado.

"And they promote this as help to homeowners?" Lawrence asked.

Lawrence points to the requirement that a second lien holder must agree to go behind, or subordinate to the refinanced loan. However, the government puts a combined (first and second) loan-to-value limit on the refinanced mortgage at 115 percent.

That could mean a significant write down on the principal of that second mortgage.

"It used to be that we could refinance a first mortgage with FHA financing to 97.75 percent of current value and the existing second could subordinate, regardless of the combined loan to value," Lawrence said. "And these discounts are provided to a borrower who is making his payments to me, on time? As the second loan holder I'd probably say no, after I stop laughing."

To be eligible for FHA's Short Refinance program, a homeowner must:

-- Be in a negative equity position

-- Be current on the existing mortgage

-- Occupy the residence

-- Have a minimum 500 credit score

-- Have a non-FHA existing loan

-- Get the existing lender to write down at least 10 percent of the unpaid balance

-- Refinance the new FHA mortgage to a loan-to-value ratio of no more than 97.75 percent.

(For more information, go to www.hud.gov.)

(David Benda is a reporter for the Redding Record Searchlight in California.)