The Federal Housing Administration has extended a principal reduction program for two years that helps borrowers refinance into FHA-insured loans.
The short refinance program was first authorized by Congress in 2008 to assist non-FHA borrowers that are underwater. It has evolved over time and is now being extended through 2016.
The FHA approved 1,660 short refis in 2013 with a total original mortgage amount of $238 million. During the first 10 months of this year, nearly 1,330 short refis have been completed, according to the agency.
In an FHA short refi, the investor must agree to write down the principal balance by at least 10% and ensure the refinancing results in a loan-to-value ratio of 97.75%. Once the refinancing is complete, the loans can be sold in Ginnie Mae mortgage-backed securities.
Bob Bodell, a vice president at Bloomington Ill.-based MSI, welcomed the two-year extension. He noted there is “still a need for the program,” which is evident from all the nonperforming single-family loan sales. Going forward, he expects FHA short refi volume will remain at current levels.
“Some of the competition has gone away,” he said. “The loans are time consuming and sometimes difficult to do. But that is all we do at our branch. So we have become very good at it.”
Hedge funds and other investors that buy distressed loans generally turn to MSI or its competitors to refinance underwater loans once the borrowers are current.
In the case of a delinquent borrower, the servicer is responsible for completing the trial payment process so the borrower can qualify for a FHA short refi.
“It is very good for the borrower,” Bodell said. “It puts them in a whole new economic picture.”
During the short refinancing transaction, MSI pays off the investor and acquires the manually underwritten FHA-insured mortgage.
“It is one of the main ways a hedge or investor can liquidate the loan,” the MSI vice president said. Then MSI turns around and sells the new loan in a Ginnie Mae securitization.
FHA conducts periodic sales of its nonperforming loans to investors. In September, it sold 14,000 delinquent loans that are stripped of FHA mortgage insurance.
Bodell would like FHA to expand its short refi program so it could be used to refinance those former FHA loans. “But it hasn’t been done yet,” he said.