(LoanSafe.org) – FHA issued Mortgagee Letter 2010-23 encourages lenders to write-down principal balances of underwater borrowers to enable homeowners to refinance into an affordable FHA mortgage.   The program enhancements require a voluntary principal reduction of at least 10%.  The maximum loan-to-value allowed under the program is 97.75% and the maximum combined loan-to-value is limited to 115%.  The loan-to-value and combined loan-to-value excludes any financed upfront mortgage premium (MIP).

The enhancements will be allowable for loans with case numbers issued on or after September 7, 2010 that close before December 31, 2012.  Because loss coverage for these enhancements are provided by funds under the Emergency Economic Stabilization Act of 2008, any delay in the availability of coverage under the EESA will postpone the implementation of the enhancements.

While many distressed homeowners may see this a life preserver, this is not a program that can help borrowers that are currently delinquent.  The program is only available for borrowers who are current on the mortgage.  Borrowers with current FHA loans are not eligible.  The property must be owner occupied, and the borrower must qualify for the new mortgage.  Additionally, the borrower must have a minimum FICO decision score of 500.  Junior liens cannot be included in the new loan amount, but may be subordinated to a maximum combined loan to value of 115%.  Also, payments on secondary financing that are deferred for at least 3 years can be excluded from the debt ratio calculation.  However, there cannot be a balloon payment due within 10 years on subordinate financing.

Borrowers whose loans have been permanently modified, including under HAMP, can qualify for the program provided they are deemed credit worthy.  If the modification was done under the Making Homes Affordable Initiative can refinance one month after the modification becomes permanent.  If the modification was not done under HAMP, the refinance can occur after the borrower has made 3 payments.

The program requires full documentation and underwriting.  However, loans that receive an Accept/Approve recommendation from FHA TOTAL Scorecard do not require the underwriter to personally review the credit report or borrower’s ability to repay the mortgage.  But, the underwriter still has to underwrite and certify the appraisal.  Loans that do not receive an Accept/Approve recommendation may still receive manual underwriting.

More information on eligibility:

Participation is voluntary and requires the consent of lien holders. In order for a loan to be eligible, the following conditions must be met:

1. The homeowner must be in a negative equity position;

2. The homeowner must be current on the existing mortgage to be refinanced;

3. The homeowner must occupy the subject property (1-4 units) as their primary residence;

4. The homeowner must qualify for the new loan under standard FHA underwriting requirements and possess a “FICO based” decision credit score greater than or equal to 500;

5. The existing loan to be refinanced must not be a FHA-insured loan;

6. The existing first lien holder must write off at least 10 percent of the unpaid principal balance;

7. The refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent;

8. Non-extinguished existing subordinate mortgages must be re-subordinated and the new loan may not have a combined loan-to-value ratio greater than 115 percent;

9. For loans that receive a “refer” risk classification from TOTAL Mortgage Scorecard (TOTAL) and/or are manually underwritten, the homeowner’s total monthly mortgage payment, including the first and any subordinate mortgage(s), cannot be greater than 31 percent of gross monthly income and total debt, including all recurring debts, cannot be greater than 50 percent of gross monthly income;

10. FHA mortgagees are not permitted to use premium pricing to pay off existing debt obligations to qualify the borrower for the new loan;

11. FHA mortgagees are not permitted to make mortgage payments on behalf of the borrowers or otherwise bring the existing loan current to make it eligible for FHA insurance; and

12. The existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification as described below.

It is interesting to note that there isn’t a hardship requirement which either leads me to believe that HUD is concerned that there may be an acceleration of voluntary defaults among higher credit tier borrowers.  This might also be a ploy to stimulate refinance activity to enhance the bottom lines of the big banks.  Regardless of the motives, extreme measures such as this only confirm that the real estate market and the economy have not recovered.

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Krista Railey
Krista Railey
Krista Railey is an finance industry consultant, California Real Estate Broker, and a 20 plus year mortgage industry professional. Krista is one of the few professionals who place humans before profits.

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