Friday, March 18, 2011
On one side we have Wells Fargo & Co. and Ally Financial Inc., two big banks considering pilot programs that would allow struggling homeowners to refinance "underwater" mortgages into U.S. Federal Housing Administration programs.
On the other end, though, sits U.S. House Republicans and their bids to eliminate the FHA's so-called Short Refi program, which the banks, in position to write down the value of these credits, need to get these programs off the floor.
With more than 20 percent of all U.S. homeowners being underwater, or possessing negative equity, on their mortgages, the FHA wants the nation's banks to tap into the Short Refi program and provide relief to borrowers and cut back on home foreclosures. Negative equity, one of the main reasons behind soaring foreclosures, severely affects the modification or restructuring of a loan.
"Without question, "FHA Commissioner Dave Stevens said,"the FHA Short Refi program has been a difficult one to get off the ground."
Banks have been hesitant to embrace a requirement within the Short Refi program where they must write down a loan by at least 10 percent and make sure the total loan-to-value ratio, after refinancing, doesn't exceed 115 percent. To qualify, homeowners must be up to date on mortgage payments and meet the FHA's underwriting guidelines. A year into the program, less than 200 borrowers have tapped into it.
For the most part, banks and investors have little interest in cutting balances for borrowers current on mortgages.
"We believe that principal writedown is absolutely needed," Stevens told a U.S. House subcommittee. "It's one of those key remaining variables left to address outside of modifications to get this economy — this housing economy — right-sized."
In Washington, D.C., though, there's little taste for such programs. U.S. Rep Spencer Bachus, R-Alabama, is leading a Republican effort to shut down four foreclosure-prevention programs. The Short Refi program and the Home Affordable Modification Program are among them.
"In an era of record-breaking deficits, it's time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners," Bachus said.
Other obstacles remain, too.
Fannie Mae and Freddie Mac, two agencies that manage about 50 percent of mortgages serviced by lenders, don't want their loans refinanced through FHA because it would reduce the value of their performing loans, possibly creating the need to increase its debt from the U.S. Treasury.