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2010-09-02 11:30:02

The FHA Has a Fannie/Freddie Look Alike Program for Underwater Homeowners Published on Monday, August 23, 2010, 12:48 PM Last Update: 1 day(s) ago by Preston Howard Category: All Articles » Mortgage and Finance


I imagine that many of you know someone who is slightly underwater on their mortgage and was able to refinance. Chances are this fortunate individual probably refinanced their mortgage because it was owned by either Fannie Mae (FNMA) or Freddie Mac (FHMLC).


Perhaps, their mortgage professional encouraged them to visit one of two websites: fanniemae.com/loanlookup or freddiemac.com/mymortgage, determined that their loan was owned by Fannie or Freddie, verified that their Loan-to-Value (LTV) didn’t exceed 105% (125% if they had a Home Equity line of credit), submitted the right paperwork to their mortgage broker and the deal was done. While this may have worked for them, what about those who are struggling to make their payment and their mortgage loan isn’t owned by Fannie or Freddie? Now, there seems to be hope for them too.


The Federal Housing Administration (FHA) just announced enhancements to the Making Home Affordable program which allows homeowners who owe more on their mortgage than the value of their home, but are current to refinance into a more affordable FHA loan. These “enhancements” are effective for loans with case numbers issued on or after September 7th and close on or before December 31, 2012. Some of the eligibility criteria for this program are:


- The homeowner must be in a negative equity position;


- The homeowner must be current on their first mortgage;


- The property must be an owner-occupied, 1-4 unit property;


- The borrower must have at least a 500 FICO score and qualify under FHA underwriting guidelines;


- The existing loan to be refinanced cannot be an FHA loan;


- The new FHA loan cannot have an LTV above 97.75%;


- If there are second liens to be subordinated, the combined LTV cannot exceed 115%;


- “Referred” loans cannot have a housing ratio higher than 31% or a total debt-to- income ratio above 50%; and


- Within the last ten years, the borrower has not been convicted of a felony, money laundering, or tax evasion.


Additionally, there are other criteria where the mortgage holder cannot use a rebate to pay off debts for the borrower or make mortgage payments on the borrower’s behalf. However, the tallest hurdle for a borrower to overcome is the 10% first lienholder write-off requirement. Any borrower looking to take advantage of this program must get their current mortgage holder to accept a minimum 10% write-off of their principal balance in order to qualify.


Initially, I thought this was a killer program. However, upon reviewing it, I have doubts. With an understanding of mortgage backed securities, I know that if a loan wasn’t purchased by Fannie or Freddie, it was most likely pooled together with other mortgages and sold off to an insurance company, hedge fund, or an investor group. If these investors bought a pool of mortgages and the underlying borrowers are making their payments, why on earth would they agree to a “cram down” (mortgage-speak for a reduction in principal balance) which thereby reduces their yield?


I have heard of people who were able to get their non-Fannie/Freddie lenders to modify their loans, but in every case, the borrower had to be delinquent on their mortgage for at least 60 days prior to receiving any form of a modification. Accordingly, if a borrower follows this strategy and is delinquent with their payments, they are no longer eligible based on the second bulleted criteria stated above. In this instance, the borrower is going around in never ending circles. In my opinion, bullet point #2 will potentially ruin what could be a very good program. A program like this one for borrowers who are current on their first mortgage is good for the consumer because non-Fannie/Freddie borrowers will finally be able to get some relief. This, in turn, is also good for the real estate industry, as mortgage professionals will have another product that they can offer their clients which provides a legitimate benefit.


Therefore, I believe that the FHA has a new program which can potentially help a lot of people who were left out of the underwater-Fannie/Freddie frenzy and need some financial relief. However, I strongly believe that the 10% cram down provision is going to slow down the process, as the investors behind the loans will not want to give away anything to a borrower who is paying on time. I think that people wanting to qualify for this program will confuse it with the others that require delinquency prior to a modification and totally put themselves in a bind, thereby rendering themselves ineligible to qualify for any of these programs. As I have said many times before regarding all of the governmental changes, bureaucracy, and grand promises, we will have to wait and see, but will soon find out!!!


Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at howardpr@rosecityrealtyinc.com.

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