New program for 'underwater' homeowners

The government has launched a program that actually reduces mortgage principal.

Posted by Stacy Johnson Wednesday, September 22, 2010 2:48:38 PM

This post comes from Stacy Johnson at partner site Money Talks News.


We've all watched as program after program rolls out of Washington, D.C., for those hapless homeowners who can't make their mortgage payments. And we've all seen or heard stories about people who simply stop paying their mortgage and walk away from their obligations.

Where's the help for the many homeowners who continue making payments on a mortgage that exceeds their home's value? It's finally here -- if you qualify.


According to a government news release, the Federal Housing Administration's "short refinance" option is targeted to help people who owe more on their mortgage than their home is worth -- or are "underwater" -- because their local markets saw large declines in home values. The program allows homeowners with negative equity to refinance into a new FHA mortgage -- one that would be less than the current value of their home.


Watch the following news story, then meet me on the other side for more.

Unlike previous programs that modify loans by doing things like lowering interest rates and extending mortgages, this one is designed to reduce mortgage balances. In short, qualifying underwater homeowners could once again resurface.

"We're throwing a lifeline out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined," said FHA Commissioner David H. Stevens. "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."

According to research firm CoreLogic, as of June 30, about 23% of mortgage borrowers nationwide owe more on their homes than they're worth. And in some parts of the country, it's much worse: In Nevada, 68% are underwater; in Arizona, 50%; in Florida, 46%; and in Michigan, 38%.


The main problem with this program -- one that will prevent many homeowners from making it work -- is that bank participation is entirely voluntary. Here are the basics:


Who qualifies? You might qualify if:
  • You have negative equity.
  • You're current on the mortgage to be refinanced.
  • You occupy the home as your primary residence -- although if it's also a rental property, it could be up to four units.
  • You can qualify for the new loan under standard FHA underwriting requirements and have a FICO credit score of at least 500.
  • The existing loan to be refinanced isn't an FHA-insured loan.

Even if you meet all those criteria, both the bank or investor that owns the mortgage and the company that services it will have to agree to reduce the loan until it's no more than 97.75% of the home's value. They also have to reduce it by at least 10%.


What you should do. If you think you're eligible, first read a complete description of the qualifying criteria in this document (.pdf file), which explains the program in more detail. Then contact the company you make your mortgage payments to monthly and ask about the short refinance program. If they're participating and say you're potentially eligible, they should be able to guide you to the proper paperwork. If they haven't heard of the program, refer them to this document (.pdf file), issued by the government to explain the program to lenders.

How much you'll pay. Refinancing through this program will entail the same closing and other costs you'd pay to take out any FHA mortgage. Keep in mind that FHA mortgages require paying mortgage insurance.


Beware your credit. Anytime a lender forgives a loan or part of a loan, that could show up as a negative on your credit history.

If you have a second mortgage. You can still qualify for the program with a first and second mortgage. The lender on the second mortgage must also agree to the refinance and, when it's complete, the combined mortgage debt can't be greater than 115% of the property's current value. The government will make some incentive payments for second-mortgage lenders that might encourage them to reduce the principal.


What about Fannie Mae and Freddie Mac loans? You heard me say in the video above that loans owned by Fannie Mae or Freddie Mac wouldn't qualify for this program. That's because these two quasi-governmental agencies have thus far had policies in place that precluded them for forgiving the principal. However, it now seems they're at least considering it. Check out this recent article from The Wall Street Journal.


Bottom line? It's good to know the government is finally tossing a line to people who have continued to pay their mortgages in trying times, even while underwater. The fact that it's voluntary for lenders may keep some otherwise deserving homeowners from being brought back to the surface. But with every rescue, the water gets a little nicer for all of us.


More from Money Talks News and MSN Money:

Tags: credit scoredebt reductionhome financinghomesMoneyTalks Newsmortgagereal estaterefinanceStacy Johnson
9/27/2010 2:36 AM

This is another government program which rewards stupid people for their poor choices.  Why do the responsible people who do everything right end up picking up the tab for the irresponsible ones? Why are we rewarding people for making bad decisions? People should have to live with the consequences of their actions.


Dump The Donkeys, your situation is much like others who made bad financial decisions and I am glad to hear your are still making your payments. However, I, like a number of others do not wish to help you with your payments. Also, credit unions are owned by the members and it appears that they don't wish to help with your payments either. From the sound of your post it appears you made 3 major mistakes. First it appears you were buying a HOME as an investment,  second it doesn't appear you did adequate research before making the purchase and third one should never plan to go into retirement with any loans.


A HOME is a place to live and anyone who purchases a HOME as an investment has a fool as a financial advisor. When it comes to investing one studies and keeps abreast of the market and either buys or sells depending on the research. Most people are not willing to do this with a HOME. In my case I sold 4 rental properties in the last half of 2005. I wanted to sell my HOME then; however, my wife said, "this is a HOME not an investment". And yes, I can feel for you because my HOME has decreased about the same percentage as your HOME; however, I am still have a very happily married man. On the brighter side my HOME is still worth more than it cost me to build in 1998. I wish you luck and if you can hold in there things will change in the next few years.

9/23/2010 6:16 PM
Since I didn't put my money into an overpriced house I couldn't afford and instead put it into my 401k for retirement is someone going to make up for my loses there? Being responsible sucks.
9/23/2010 4:45 PM

Dump The Donkeys

Get a friken roomate like everyone else who needs to lower their housing costs.  Why do two people ready to retire NEED a $350K house anyway?  Oh yeah!  You wanted to make a killing.

It's time to face reality.

9/23/2010 4:36 PM

Dump the Donkeys,

Looks like you're one of the stupid, duped people mentioned by Dead Body. 

Why would you by a house so close to retirement that you can't afford in retirement?  Appears to me you were trying to cash in on the bubble and it burst in your face.  Don't use my shirt to clean yourself off.

if only i would have taken out  equity in my home,lets see ,now i would have a  free pool,free auto,free vacation,etc.brilliant i say, friggin brilliant
be careful of a little thing called a silent 2nd its a 0 interest loan that will be pd for when the house is sold so if you think you're lowering your mtg. debt think again.
9/23/2010 4:11 PM

Hey, J453:  My house has never been "underwater;" because I bought what I could pay for when I bought it.  I could sell my house and make a profit, today.  What you responded to, is not what I said.  So I'll clear it up for you:  when you buy more, anything, than you can pay for, especially when it was never worth what you paid for it to begin with--and that is the underwater truth--then don't expect your compatriots (me and every other American) to pick up your tab so you are rewarded for your poor choice(s).  We don't want to bail out your house with our money--whether it comes from the bank (who will end up charging me for it somehow) or the government (again, charging me somehow) or any other fake module pretending to be fixing the American dream.  Dream on; I'm telling you:  this is about 5,000 years of land law revision and it is not pretty.  Reading comprehension is an art best practiced, J453:  and practice makes perfect.

9/23/2010 1:36 PM

I completely agree with Dead.


Dump, honestly, there was no way of knowing??? Common sense would tell you that a house that was $200K that went up to $400K within a very short time is not going to stay at that level. And everyone like lemmings runs to do the same thing. How about we take resposibility for our mistake and pay for them ourselves? If we have to suffer personally, kill our credit, rent a smaller place, etc. so be it. Those of us who make responsible decisions and can look beyond me-me-me shouldnt have to pay for other people's stupidity.


Plus, housing markets are volatile. It is up to us to be responsible citizens and make smart financials decisions but that is so unAmerican now, it makes me sick. There is no sort of self control or long term thinking. Where did we get this absurd notion what we are entitled to things or deserve them and when we mess up, someone else will pay for it?

9/23/2010 12:45 PM

To the narrow-minded thinkers like SB35, diditonce, dontholdyourbreath and other of their ilk, there are many homeowners out there who pay their bills and mortgages but own homes in cities where values have tanked.  We happen to live in an area of the country that was one of the hardest hit by housing declines.  The value of our house dropped from about $350,000 to in the $225,000 range.  When we bought our house there was no way of knowing that this was going to happen.  Like many we know, we did not overbuy and we are responsible people; we pay all of our bills and mortgage on time.  So long as we are working we can afford to make all our payments.  This program would have been a big help to us.  But, our credit union has already informed us that they are not participating in the program.  So, being less than six years from retirement age, we are trapped in house that we can’t sell and don’t know when the value will recover to the point that we can sell it.  Now, we no longer talk about retiring because if we do, we won’t be able to afford the mortgage payments.  Our goal now is to be able to support ourselves, keep a roof over our head and not become dependent on welfare.  That’s not exactly what we planned for our retirement years but is our reality!

9/23/2010 12:21 PM
Over my dead body will I continue to pay my full mortgage and property taxes at the rate at which I entered into my contract to do so; while stupid, duped people clean up their mess of a poor choice, off my back!  Get these jerks who pander to this illegal, immoral crap out of office, out of power and out of influence, now.  Get them out. Get them out. Get them out.  They should lose their houses and try again for something they can actually afford.  What happened to making the investment in a home:  and waiting for it to appreciate over time--meaning ten, twenty years?  5,000 years of land law is being wiped away with this crap and it is going to come back to haunt every citizen in this country; what will we all be crying about then?  Too late, we won't have legal title or recourse to squat, then.
9/23/2010 12:16 PM
I have a car loan that it more than my car is worth, if I live in it  do I qualify?
9/23/2010 10:14 AM
Here's an idea.  As a retiree my present problem is cash flow.  Low rates of return are killing my long term forecast.  How about letting me take money from my IRA, without penalty, and pay off my mortgage? 
9/23/2010 10:13 AM
There ya go - let's reward people who overpaid for their house.  Heck, why don't we just give everyone in America a free house -we could call it "Dollars for Domiciles".
9/23/2010 9:57 AM

Every program they’ve implemented requires lien holders to take big losses, something they’re not willing to do.  The previous programs were abject failures and this one will be as well.


Politicians have been dissin’ and demeaning banks for years, so banks are not going to do anything to help those politicians now.


Politicians are desperate and after the 2010 election they’ll be in survival mode for 2012. This means they’ll freely spend taxpayer money making it worth the banks while to deal with them, so the banks are holding out for a bigger payoff which they will surely get.


Lien holders are not going to take a loss and let the delinquent borrower off the hook, if they have to lose they’ll be sure to make sure the deadbeat loses as well.

9/23/2010 9:47 AM
Welcome to the United Soviet States of America comrades!  From each according to their ability to each according totheir needs.
9/23/2010 9:28 AM
It called cash for cons! Anyone with a score of 500 -means you've never paid anyone anything on time, gets bailed out even if you misrepresented your income and gambled we our future! The good folks with good intent that lost jobs, etc don't qualify! In the interest of fairness & equality!
9/23/2010 9:22 AM

What about those people who owned a house for 10-15 years and loss 30-50% equity, but are not underwater?

I put 30% down on my house five years ago and loss 30% equity, but not underwater.  I'm tired of working by butt off to have better things then have to watch people just given money, my tax money.  I lost 50% in the market in 2001, where is my bailout? 

9/23/2010 8:51 AM
This article left out the most important result of such refinacing. The forgiven debt will be considered taxable income. Do you really want to pay 25% tax on say $30,000 of forgiven debt.
This is another example of the current administration wanting to take away from the responsible people and give to the irresponsible. It is called buying votes for the majority of the financially irresponsible I know vote for the donkey.
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