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Mortgages

FHA 'Short Refi' under attack

by Broderick Perkins

(3/21/2011) If you want to refinance your way out of a mortgage that's greater than your home is worth, beat a fast path to your lender.

Time may be limited for a federal program that promotes special refinanced mortgages.

More lenders are on board with the Federal Housing Administration's (FHA) so-called "Short Refi" program, but some legislators would like to vote it down.

Last week, the Republican-led House of Representatives voted to kill the FHA program citing it as an example of wasteful government programs that spend more to save a single borrower than it costs to buy a home.

Days later, big banks, including Bank of America, JPMorgan Chase, and Citigroup, joined Wells Fargo and Ally Financial/GMAC as participants in the struggling program. Nearly two dozen lenders participate in the program launched late last summer. Right now, the program isn't due to expire until Dec. 31, 2012.

The Obama Administration has defended the program, even though only a few hundred home owners have applied. The administration originally estimated the $14 billion program would help between 500,000 and 1.5 million homeowners.

For those who qualify with participating lenders, the Short Refi program enables homeowners in "underwater" mortgages to refinance out of a non-FHA backed mortgage, into an FHA mortgage with a lower fixed rate. (Underwater mortgages are those that are greater than the home is worth.) The lender holding the current mortgage must agree to write down the excess principal on the mortgage, with the government covering some of the cost.

Few of the complex refinances have been written because the first lender has to agree to write off 10 percent or more of the borrower's unpaid principal balance (enough so the first mortgage is no more than 97.75 percent of the home's value and any combined mortgages total no more than 115 percent of the home's value) and second lien holders must also forgive some, if not all, of what the borrower owes.

Cash incentives for lenders are in place to encourage more Short Refis.

In order to qualify:

• The borrower's current loan cannot be insured by the FHA, which underwrites mortgages but does not originate them.

• Home owners must be current on their payments and the property must be his or her primary residence. Second homes, vacation homes and investment properties do not qualify.

• Borrowers must apply for the new loan by submitting full documentation.

• The home owner must meet the FHA's standard underwriting requirements, and have a credit score of 500 or more.

Contact your lender to determine if you are eligible.

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