The Obama administration has opened the door for nearly 1 million existing Federal Housing Administration (FHA) borrowers to refinance by encouraging lenders to originate more 'streamline' refinancings.  But will it happen?

The FHA is changing its Credit Watch monitoring system, making sure that lenders are not penalized for refinancing risky borrowers trapped in high interest rate loans.

As part of the president's new plan to help struggling – but current --   homeowners, FHA is removing 'streamline' refinanced loans from the lender's Credit Watch "compare ratio," according to a White House fact sheet.

"This will open the program up to many more families with FHA-insured loans," the White House said.

The Department of Housing and Urban Development (HUD) estimated 1 million FHA borrowers could take advantage of the streamline refinancing program, which does not does require full underwriting. The "greatest numbers" of those borrowers took out mortgages in 2008 and 2009 and are likely underwater, according to a recent HUD report.

The FHA streamline program does not have a loan-to-value limit, which means underwater is not a hindrance to refinancing.  

Nevertheless, originations of streamline refinancings have dropped from 93,200 loans in the third quarter of 2010 to 18,470 loans in the third quarter of 2011, according to the latest figures from FHA. 

HUD officials decided that its Credit Watch system — which ranks lenders based on their delinquency and claim rates — could be part of the problem.

Streamlines are the worst performing FHA loans. The more streamlines a lender approves, the higher their D&C claim rate climbs in relation to other FHA lenders. In turn, this makes the lender's "compare ratio" look bad, which can result in loan audits, demands for reimbursement for loan losses and even removal of the lender's direct endorsement authority.

Some borrowers that are eligible for streamline refinancings are "being denied by lenders reticent to make loans that may compromise their status as FHA lenders.  To resolve this issue, the FHA is removing these loans from the compare ratio," the agency said.  

FHA will continue to use its Credit Watch system to monitor the performance of other FHA refinancings and purchase mortgages.

FHA consultant Brian Chappelle noted that lenders that don't fund many streamlines could see their compare ratios deteriorate as a result of FHA's decision.  

"It will really help the big servicers who did a lot of streamlines on their portfolios," he said.  Chappelle is one of the founders of Potomac Partners in Washington.

"You will see the delinquency and claim rates for all the big servicers improve significantly," he added.

FHA will be issuing guidance on the treatment of streamline refinances and the compare ratio soon, according to a HUD spokesman. However, as the holiday weekend approached the agency had offered no update on its guidance.

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