FHA Refinance of Borrowers in Negative Equity Positions

Who is the target market?

FHA’s new refinance opportunity is targeted to help people who owe more on their mortgage than their home is worth because their local markets have seen large declines in home values.

What are the borrower eligibility requirements?

• Existing loan to be refinanced is not FHA insured;

• Must owe more on their mortgage than the value of the property;

• Must be current on the existing mortgage to be refinanced;

• Must have a “FICO based” decision credit score greater than or equal to 500;

What are the borrower eligibility requirements?

• Existing first lien holder must write off at least 10% of the unpaid principal balance (UPB);

• Loan-to-value (LTV) ratio of no more than 97.75%;

• Combined loan-to-value (CLTV) ratio must be 115% or less; and

• For manually underwritten loans, the qualifying ratios can be no greater than 31/50.

Standard FHA underwriting requirements apply

Is a homeowner with a conviction eligible for the

Short Refinance?

A homeowner is not eligible for assistance under any mortgage assistance program authorized or funded by EESA if such person, in connection with a mortgage or real estate transaction, has been convicted within the last 10 years of any of the following: (a) felony larceny, theft, fraud, or forgery; (b) money laundering; or (c) tax evasion. 

Can lenders pay off the borrowers’ debts?

• Premium pricing cannot be used to pay off existing debts to qualify the borrower;

• FHA mortgagees are not permitted to make the borrowers’ mortgage payments or otherwise bring the existing loan current; and

• Existing loan to be refinanced may not have been brought current by the existing first lien holder, except through an acceptable permanent loan modification.

Is a recently modified loan considered current?

Yes.– For loans modified under the Making

Home Affordable Modification Program (HAMP) program, the loan may close the month following permanent modification.

– For non-HAMP modification program loans, the borrower must have made three monthly payments on time and the modified mortgage must be current for the month due.

Loans in a temporary or trial period are not eligible.

Is secondary financing permitted?

Yes.– The subordinate lien(s) must not provide

for a balloon payment before ten years; – Must permit prepayment by the borrower,

without penalty, after giving 30 days advance notice;

– Periodic payments shall be collected monthly; and

– Payments on subordinate financing are required in the qualifying ratios.

How will these refinance loans affect the lender’s

performance?

• Neighborhood Watch will display these refinance loans separately in the lender’s performance compare ratio.

• For the Credit Watch Termination initiative, these refinance loans will not be included in HUD’s performance analysis of a lender’s compare ratio.

• If a violation of any FHA program requirements is found to have occurred, the lender will be subject to administrative action e.g., indemnification, possible civil money penalties, etc.

Are there any changes to the claims for insurance benefits?

• Lenders will be required to submit a separate claim filing with the designated disbursement agent for that portion which is payable from the Emergency Economic Stabilization Act of 2008 funds; and

• Further instructions will be provided in a subsequent Mortgagee Letter.

Does the borrower need to know any additional information?

• Borrowers must be made aware that the short refinancing under this program may be reflected as a negative feature on their credit score.

• Borrowers must be advised to consult with their tax advisors regarding the cancellation of debt and possible tax consequences.

Are there servicer incentives for extinguishing all or part of the

debt?

• First lien investors will not be entitled to incentive payments for any of the debt extinguished;

• Existing second mortgage lien servicers will be entitled to a one time incentive of $500 for each successful closing; and

• Existing second mortgage lien investors will be entitled to an incentive based on the CLTV of the existing liens if any portion of the debt is extinguished.

Treasury FHA Refinance Compensation Per Dollar of UPB Extinguished

in (Loans Less than or Equal to Six Months Past

Due)

105% to <115% 115% to 140% >140%

0.21 0.15 0.10

For loans that were more than six months past due at any time during the 12 month period prior to the FHA Refinance closing date, irrespective of CLTV range, second lien investors will be paid $0.06 per dollar of principal extinguishment and will not be eligible for incentives in the above extinguishment schedule.

What are the eligibility requirements for second lien holders to receive incentive

payments?

• A second lien holder must execute a Servicer Participation Agreement (SPA) and related documents with Fannie Mae in its capacity as financial agent as designated by Treasury on or before October 3, 2010.

• Second lien holders that have previously executed a HAMP SPA will be required to execute an Amended and Restated SPA or an additional Service Schedule that includes FHA2LP, as applicable.

How can a second lien holder sign up to be eligible for

incentive payments?

• Servicers that have not executed a HAMP SPA should follow the online registration process at www.HMPAdmin.com (click on the Registration tab) or call the HAMP Support Center at 1-866-939-4469.

• Servicers who have executed a HAMP SPA must complete the appropriate registration form(s) for FHA2LP and email them to the HAMP Support Center at setup@HMPAdmin.com.

Original Value 350,000UPB First Lien 280,000UPB Second Lien 70,000Current Value 210,000Max CLTV (115%) 241,500New First Lien (97.75%)

205,275

New UPB Second Lien 36,225Reduction by First Lien 74,725Reduction by Second Lien

33,775

Net Forgiveness 108,500

ExampleScenario 1

• Loan is less than six months past due.

How is the incentive payment for the second lien holder

calculated?Current CLTV - 167% 350,000.00CLTV - 140% 294,000.00Difference 56,000.00Reduction Second Lien 33,775.00Incentive Payment - $.10 3,377.50

• Existing second mortgage lien servicers will be entitled to a one time incentive of $500 for each successful closing.

The reduction of the second lien is less than $56,000 so the Treasury FHA Refinance Compensation would be calculated at greater than 140% CLTV.

Original Value 100,000UPB First Lien 60,000UPB Second Lien 60,000Current Value 60,000Max CLTV (115%) 69,000New First Lien (97.75%) 58,650New UPB Second Lien 10,350Reduction by First Lien 1,350Reduction by Second Lien

49,650

Net Forgiveness 51,000

ExampleScenario 2

• Loan is less than six months past due.

How is the incentive payment for the second lien holder

calculated?Current CLTV - 167% 120,000CLTV - 140% 84,000Difference 36,000CLTV - 115% 69,000Difference 51,000Reduction Second Lien 49,650Incentive Payment - $.10 ($36,000) 3,600Incentive Payment - $.15 ($13,650) 2,047.50Total Incentive Payment 5,647.50

The reduction of the second lien is greater than difference between current CLTV and 140% CLTV so $36,000 of the extinguishment would be calculated at greater than 140% CLTV and the remainder $13,650 would be calculated at 115% CLTV.

What are benefits of these refinances?

• Provides lenders and borrowers with an affordable stable loan product;

• Helps to stabilize communities that have seen a decline in housing prices; and

• Costs will be shared between the private sector (1st and 2nd lien investors) and the federal government (HUD and Treasury).– Private sector will be extinguishing debt.– Treasury will be paying incentives to second

lien servicers and investors.– HUD and Treasury would pay the claim.