As planned, the U.S. Department of Housing and Urban Development (HUD) has begun providing an additional refinancing option for underwater borrowers. Originally announced in March, the Federal Housing Administration (FHA) short-refinance program will offer certain underwater non-FHA borrowers the opportunity to qualify for a new FHA-insured mortgage.
Participation in the program is voluntary and requires the consent of all lienholders. The homeowner must be current on his or her existing mortgage and must qualify for the new loan under standard FHA underwriting requirements. The property must be the homeowner's primary residence, and the borrower's existing first-lien holder must agree to write off at least 10% of his or her unpaid principal balance.
The refinanced FHA-insured first mortgage must have a loan-to-value ratio (LTV) of no more than 97.75% and a combined LTV no greater than 115%.
To facilitate the refinancing of new FHA-insured loans under this program, the U.S. Treasury Department will provide incentives to existing second-lien holders who agree to full or partial extinguishment of the liens.
To be eligible, servicers must execute a Servicer Participation Agreement (SPA) with Fannie Mae on or before Oct. 3.
HUD's mortgagee letter, which outlines the program in greater detail, can be viewed here.