The Federal Housing Administration (FHA) has revamped a little used program for refinancing underwater conventional loans, and extended its "short refinance" program until the end of 2014.
Lenders have completed only 840 short refis since FHA rolled out the program in August 2010. The main stumbling block has been the lack of a secondary market execution, according to Mark Stamm, who is advising MSI Mortgage Services III, Bloomington, Ill., on growing its FHA short refinance program.
In a short refi, the lender must reduce the principal amount of the mortgage debt by at least 10% to get the first lien down to a loan-to-value ratio of 97.75%-or 115% with a second mortgage.
If the loan is delinquent, a borrower can qualify by completing a three-month payment trial.
Previously, FHA required the servicer to engage in a permanent loan modification, which in many cases required a reduction of principal, to start the payment trial.
Now, the servicer can simply exercise forbearance to conduct the payment trial. "That is the most significant change" FHA made in the program, Stamm said–that and extending the program for two years.
FHA short refis can be placed into a Ginnie Mae MBS. But Ginnie Mae issuers and servicers are leery of these loans because there are so few of them, plus they're unsure how they will perform.
"We have been working on creating a secondary market," Stamm said. "This is very close to happening," he added. But this secondary market is only for MSI loans that will be originated out of a call center in Frederick, Md., and managed by MSI vice president Bob Bodell.
"We are not interested in buying loans from others," Stamm said.