FHA Launches Underwater Mortgage Refinancing Program

In a government effort to help homeowners who owe more on their mortgages than their homes are currently worth, the Housing and Urban Development Department (HUD) today announced that it is launching a program to aid underwater mortgage holders.

Underwater Home mortgage

A growing segment of Americans are angered over the foreclosure crisis, many of whom have lost their homes to foreclosure or know someone who has as a result of no longer being able to afford their mortgages.

Millions of mortgage holders have been foreclosed in the worsening real estate collapse, many of whom are unable to refinance their principal residences.

The adjustment to the refinancing program, announced by the White House earlier this year will enable mortgage lenders to provide additional refinancing alternatives to homeowners. The program is for primary residences that have dropped in value as part of the Obama administration’s effort to aid homeowners in distress.

The Federal Housing Administration (FHA) will offer some underwater non-FHA borrowers who are current on their mortgages, and whose lenders agree to cut at least 10% off their existing mortgages an opportunity to qualify for a new FHA mortgage, according to the announcement. The program will be launched on Sept. 7, 2010.

Underwater Homeowner

Surveys show that nearly 1 in 4 homeowners are underwater on their mortgages. The effort is part of the Obama administration’s goal to stabilize housing markets “by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.”

“We’re throwing a life line out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined,” said David H. Stevens, FHA commissioner. “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”

The Treasury Department will provide financial incentives to existing second lien holders who agree to full or partial extinguishment of second mortgages or lines of credit levied against homes.

As part of its efforts, the FHA issued a mortgage letter to lenders providing details on how to implement the new program. Lenders will not be required to take part in the program. The plan is on a voluntary basis.

Eligibility requires mortgage holders to be current on their loan payments, and they must owe more than the current appraised market value. The program will require a minimum credit score (FICO) of 500. The borrower’s first lien holder (bank and investors) must agree to write off at least 10% of the mortgage balance, reducing the loan amount to no greater than 115%.

The mortgage to be refinanced cannot be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.