Track the Stimulus

On March 26, 2010 the Treasury Department announced an addition to it Making Home Affordable program to provide incentives for lenders to reduce the principal amount of mortgages that are underwater for owners that are current on their payments.  Due to the collapse of the housing market it is estimated that 24% of mortgages are currently underwater, meaning the value of the unpaid mortgage principal is higher than the market value of the house.  This provides a rather perverse incentive for homeowners to default on their mortgages.  The program looks to provide incentives for lenders to work with homeowners and reduce the amount of principal outstanding to bring the mortgage down to FHA standards that require the mortgage to be at most 97.75% of the value of the abode and allow them to provide a refinanced loan that is FHA insured.  The program also provides incentives for second lien holders to reduce or extinguish the value of the second lien.  The maximum amount of mortgage debt that a borrower participating in the program will have after modification is 115% of the value of the current market value of the home - a maximum of 97.75% for the new FHA insured primary mortgage and a maximum of an additional 17.25% of the current market value of the home for the refinanced second lien.

It is important to point out that the program is optional for lenders, so even if you are an eligible borrower, your lender may not agree to refinance your loan.  The government is asking lenders to contact borrowers that qualify for the program directly.  The Treasury Department expects to finalize the program rules and regulations over the next few months and for the program to be up and running by the fall 2010.

Who qualifies for the FHA Refinance Option for Underwater Homeowners? 

• Homeowners whose are current on their mortgage payments;
• Home must be owner occupied, and be the owner's primary residence;
• Homeowner must document sources of income;
  
• Homeowners must qualify under FHA underwriting guidelines, including a FICO credit score above 500;
• Loans have to have originated before January 1, 2009;
• Lender must agree to write-down the principal on the loan by at least 10%;
• Loan must not be currently insured by FHA.
  

It should be noted that homeowners that participate in the program may see their credit score affected, as the refinancing will be reported as loan forgiveness.

What will homeowners get? 
Underwater homeowners will see the value of their primary mortgage fall to at most 97.75% of the market value of their homes.  The new refinanced loan will be FHA insured, and will therefore be subject to FHA insurance premiums.  If the home has a second lien, the total mortgage debt including primary and secondary liens will not exceed 115% of the current market value of the home.

How does the FHA Refinance Option for Underwater Homeowners work? 

• Lenders will notify homeowners if they have been selected to participate in the program (the program is voluntary, so the lender is under no obligation to refinance the loan).
  
• Lenders will ask for proof of income, residence and other requirements to ascertain whether homeowner satisfies FHA underwriting guidelines;
• Primary lender agrees to reduce the unpaid principal on mortgage by at least 10% - the refinanced primary mortgage will not exceed 97.75% of the LTV (loan-to-value, current market value) of the house;
• Secondary lien-holders agree to either:
• extinguish the loan, or
• resubordinate the loan and write-off any amounts in excess of 115% of the current value of the home.
  
• The new refinanced loan will be:
• FHA insured;
• Have an interest rate set at the current FHA mortgage rate (including FHA insurance premium);
• Total mortgage payments will not exceed 31% of the borrowers gross income;
• Total debt payments (including all sources of debt) will not (except for people with very strong credit histories) exceed 50% of the borrowers gross income.
  

What are the terms of the FHA Underwater refinancing? 

• The refinanced mortgage needs to meet FHA underwriting requirements.
  

How does the Treasury support the FHA Refinance Option for Underwater Homeowners? 

• Services will be offered unspecified incentives to facilitate the process;
• Primary lenders will benefit from FHA's guarantee on the value of the new loan (up to 97.75% of the current market value of the home);
  
• Secondary lien-holders will be offered incentive payments to extinguish or write-off the loan principal amount according to the following schedule based on the combined LTV (primary and secondary mortgage):
  
• For loans with a combined LTV of 105%-115% secondary lien-holders will receive $0.21 per $1.0 written-off;
• For loans with a combined LTV of 115%-140% secondary lien-holders will receive $0.15 per $1.0 written-off;
• For loans with a combined LTV greater than 140% secondary lien-holders will receive $0.10 per $1.0 written-off.
• Treasury will support the program using up to $14 billion from TARP funds.
  

Anything else? 

• FHA will regularly publish data on the number of loans refinanced and their statistics.
  

NOTE: Just to be clear - we are NOT a government sponsored site, and we try to keep the information on the site accurate and up-to-date.  Nevertheless, there may be errors, and you should check the information on qualifications and other details for the plans with your mortgage agent.  For homeowners the government provides a simple self-assessment test at: http://www.makinghomeaffordable.gov.