FHA Releases More Details on Program Aimed at Upside-Down Borrowers

The Federal HousingrnAdministration (FHA) published a new mortgagee letter on Friday laying out therndetails of enhancements to its Making Home Affordable Program (MHA) and its ownrnrefinance program aimed specifically at “upside-down” homeowners.  The changes were first announced on March 26rnand will take effect on September 7.  </p

The enhancements arerndesigned to maintain homeownership for borrowers who are current on theirrnmortgage but owe more on those mortgages than the market value of thernhome.  Like most of the measures thatrnhave been undertaken to stem the flow of foreclosures and stop the collapse ofrnthe housing market, these changes rely to a great extent on the cooperation ofrna homeowner's existing lenders who must be willing to write off at least 10rnpercent of the outstanding balance of a senior lien or relinquish orrnre-subordinate a junior lien position.</p

Participation in thernvoluntary program is limited to homeowners who, In addition to a negativernequity position and being current on mortgage payments, must be thernowner-occupant of a 1-4 family home used as the primary residence and notrncurrently financed with an FHA guaranteed mortgage.  The borrower must qualify for the new loanrnunder current FHA underwriting guidelines which, among other criteria, requirerna “FICO-based” credit score of at least 500.</p

The requirement thatrnthe mortgage be current does not eliminate borrowers who have curedrndelinquencies.  A borrower who hasrnsuccessfully completed the trial modification period under the Making HomernAffordable Modification Program (HAMP) may close on one of the new loans thernmonth following the conversion of his loan to permanent status.  In the case of a non-HAMP modification, thernborrower must have made three monthly payments on time and be paid-to-date atrnthe time the loan is made.</p

The new FHA mortgagerncan have a loan to value (LTV) ratio of no more than 97.75 percent, and ifrnjunior liens are re-subordinated to the new loan, the combined indebtedness canrnnot constitute more than a 115 percent LTV of the refinanced loan.</p

The new mortgage canrnbe used only to refinance the unpaid principal balance on the first lien plus anyrnprepaid interest for the month the mortgage is originated, prepaymentrnpenalties, late charges, escrow shortages, closing costs, prepaid expenses, andrndiscount points.  Any charges that wouldrnput the LTV above the levels described above would have to be written off byrnthe mortgagee. </p

In underwriting thernloan, lenders are not permitted to use premium pricing to pay off existing debtrnobligations in order to qualify the borrower nor are they allowed to makernmortgage payments on behalf of the borrowers or otherwise bring the loanrncurrent in order to qualify for FHA insurance. rnThe existing mortgagee is also prohibited from bringing its mortgagerncurrent except through an acceptable permanent loan modification.</p

For loans thatrnreceive a “refer” risk classification for TOTAL Mortgage Scorecardrnand/or are manually underwritten, the homeowner's total monthly mortgagernpayment including mortgage payments, cannot be greater than 31 percent of grossrnmonthly income and the total debt cannot be greater than 50 percent.</p

Under the program arnjunior lien holder would be eligible for a $500 cash incentive forrnextinguishing all claims on the collateral. rnIf the junior lien holder merely agrees to re-subordinate his lien, thenrnthe subordination documents may not provide for a balloon payment within tenrnyears from closing unless the property is sold or refinanced and must permitrnthe borrower to prepay the loan without penalty with 30 days advancernnotice.  Any required payments on thernlien must be collected monthly and, unless any forbearance is for a period ofrnat least 36 months, any payment must be included in the borrowers qualifyingrnratios. </p

The agency cites arnHUD Regulatory analysis that concluded that at least one-half million peoplernwould take advantage of the enhancements in order to refinance although as manyrnas three times that number is thought possible. rnThe economic benefits of the program could be as little as $11.8 billionrnor as much as $35.3 billion.</p

FHA advisesrnborrowers that their credit reports and credit scores might be damaged becausernof the principal forgiveness requirement and that they should also consult arnfinancial advisor about any tax ramifications that might come from their participationrnin the program.

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