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Great article on why so many of these governement programs are good in theory, but not in execution.   

No big rush on help for underwater home loans

WASHINGTON - Feb. 8, 2011 - A government program intended to help hundreds of thousands of underwater homeowners is off to a slow start.

Since its September launch, only 38 homeowners have refinanced mortgages through the FHA Short Refinance program, backed with $11 billion in federal funds. The Federal Housing Administration has said the program could eventually help 500,000 to 1.5 million borrowers.

The program requires mortgage owners to forgive at least 10 percent of a borrower's unpaid principal so that the loan can be refinanced into an FHA loan at a lower interest rate. The goal: keep homeowners out of foreclosure even if they owe more on their homes than the homes are worth.

Foreclosures depress home values, weakening the economy. About 10.8 million homeowners, 23 percent of those with mortgages, are underwater, according to researcher CoreLogic.

But the industry has yet to embrace the program, says FHA Commissioner David Stevens. He says the numbers are "lower than we would like." As of Jan. 28, 223 applications were pending, he says.

The results indicate "a pretty clear rejection," says Alan White, associate professor of law at Valparaiso University.

A big hurdle is that the program requires principal reductions on loans that homeowners have kept current. "Banks aren't eager" to reduce the principal on such loans, says Laurie Goodman, a senior managing director at Amherst Securities.

Principal was reduced on just 4.5 percent of the loans modified in the third quarter, government data indicate. Most modifications involved lower interest rates or longer loan terms.

Another obstacle is that Fannie Mae and Freddie Mac, which own or guarantee half of the nation's home loans, don't make principal reductions. The Obama administration wants the mortgage giants, which were taken over by the government in 2008, to participate in the FHA program, Stevens says. But their regulator, the Federal Housing Finance Agency, says that the question of principal reductions has been "under review," spokeswoman Corinne Russell says.

Bank of America, the largest mortgage servicer, says it'll take part in the FHA program if Freddie and Fannie do. They own half the loans that BofA services, BofA's Dan Frahm says. Without their loans, the number of eligible customers would be "extremely limited," he says.

The FHA program is one of several government attempts to curb foreclosures. Its main effort, the Home Affordable Modification Program, was dubbed a "failure" last month by Neil Barofsky, the special inspector general for the government's bank bailouts. As of Dec. 31, HAMP had 522,000 permanent loan modifications underway. Started two years ago, HAMP was projected to help at least 3 million homeowners.

© Copyright 2011 USA TODAY, a division of Gannett Co. Inc.

picture contributed by www.bankrate.com

The term Short-Refinance has been making the rounds through the real estate industry and on Saturday, the Obama-led government has put out their newest way to keep foreclosures from continuing.  In an effort to stop the rate of foreclosures, the government has come up with a Short Refinance.

Short refinances are intriguing and many of us told the banks this several years ago.  I cannot tell you how many times people have asked me can't I just settle with my second lien holder and stay in my home.  Well now it may be available for you.

What is a Short Refinance?

A Short Refinance is where your existing mortgage company agrees to pay off your mortgage and replace it with a new loan with a reduced principal. 

Q: Am I eligible?

• If you have a conventional loan (not a current FHA backed loan)
• Typically banks do short refinances with only borrowers that are current. 
• Required to fill out a regular loan application and meet all underwriting guidelines of a normal loan including, but not limited to credit, income, debt-asset ratios, etc.  
• These are all full documentation loans so you must supply all the necessary documentation including tax returns, paystubs, and bank statements.

Loans that were originally taken out as FHA loans are not elgible for a Short-Refinance.

If your loan is owned by Fannie Mae or Freddie Mac they are not currently participating in this program and at this time are not eligible.

They however are doing refinances up to 107% and sometimes as much as 125% of the existing current mortgage for those borrowers that are upside-down and have a Fannie Mae or Freddie Mac loan.

Fannie Mae loan refinance elgibility

I am Eligible now what?

The investor, servicer, and current lender (whichever are applicable) must agree to reduce the principal balance of the new loan to 97.5% of that loan.  There is also a clause in there stating that the lender must agree to reduce the principal balance by at least 10%.  If they agree to the short refinance than the borrower will have a new FHA loan at prevailing interest rate. 

Are there any additional closing costs involved?

Borrowers will have ordinary closing costs associated with the refinance.  Since it is an FHA loan they will be required to pay the mortgage insurance premium as well.

How will the principal reduction effect my credit score?

It will effect your credit score.  Lenders will report to the credit bureau as settled and not as paid as agreed since a portion of the principal balance you originally agreed to is being forgiven.

Does the property have to be the borrower's primary residence?

Only owner-occupied primary residents are eligible for a Short Refinance.  Investment and second home properties are not eligible for the short refinance.

Can I do a Short Refinance if I have an existing second mortgage?

Yes as long as the combined loan to value is no greater than 115% of the property's recently appraised current value.  This means both the first and the second combined.  For example:  Your house is valued at $300,000.  Your combined first and second mortgages cannot be more than $345,000.  If it is greater than the first lien and/or second lien holders they will need to agree to reduce the principal balance to less than 115% of the current value.

Why would a second-lien holder agree to the short term refinance?

The government like in the loan modifications and short sales have incentives to reduce that principal.  Many times the second lien holder will take a percentage of the balance as a payment to wipe out the mortgage entirely.