‘Short-Refi Program’ application numbers are rising as lenders sign up to participate, the Federal Housing Administration (FHA) reported last week. The Department of Housing and Urban Development (HUD) received 387 applications and endorsed 89 cases as of March 11, 2011, close to double the volume from the previous week. The FHA commissioner also confirmed 23 lenders, including heavy hitters such as Wells Fargo, Citigroup, Ally Financial and JPMorgan Chase, have agreed to participate in the program.
The ‘Short-Refi Program’ (Short-Refi), an $8 billion foreclosure prevention and mortgage relief plan launched in September 2010, is a government effort to assist qualified underwater homeowners. A negative equity homeowner current on his mortgage payment can refinance into an FHA-insured mortgage if his lender agrees to write off at least 10% of the first mortgage’s principal balance, a process called a cramdown.
The FHA was called earlier this month by the House Financial Services Committee to defend Short-Refi largely due to campaigns pushing to cut costs by ending housing assistance programs. At the time the FHA testified before the committee, $50 million had been spent with only 44 loan cases approved in the whole nation – a pittance.
The largest contingent of naysayers holds that money from the program is going to lenders and banks, rather than burdened homeowners. Others argue the program will bring about high taxes in the future. Though the FHA explained more time and infrastructure was needed for Short-Refi to gain momentum, the House of Representatives agreed the program should be terminated.
first tuesday take: Short-Refi’s attempt to initiate a partial cramdown and lend a hand to distressed homeowners is gracious, but lenders are not playing along. Their participation in the program is best symbolized by a hesitant pinky finger if not a definitive thumbs down. This program is rendered nearly useless by a debilitating Achilles’ heel: lender participation is voluntary, and they have no impetus to participate if the homeowner is current on his payments. Unless the government applies pressure or offers a profitable incentive, lenders are not going to cut a deal for negative equity homeowners who have not defaulted for fear of creating the precedent of a moral risk. [For more information on the FHA Short-Refi program, see the September 2010 first tuesday article, FHA ‘Short-Refi Program’ debt relief for underwater homes.]
As first tuesday predicted when the program launched last September, Short-Refi has failed. With only 44 homeowners approved in the whole nation, and at the expense of $50 million pulled from Troubled Asset Relief Program (TARP) funds, the truth is in the numbers. The total count of homeowners approved is a lonely stone of a figure when compared to the 69,799 notices of default (NODs) and 35,431 homes that went to trustee’s sales in California alone in the fourth quarter of 2010. [For more information on California’s 2010 foreclosures, see the February 2011 first tuesday article, 2010’s defaults and foreclosures.]
The numbers attest that Short-Refi loan modification plainly does not have the teeth to render an effective or efficient solution for troubled homeowners. As has been first tuesday’s mantra since we entered the Great Recession and began our trudge across the recovery plateau, the only way out is a full cramdown policy involving the bankruptcy courts. [For more information on cramdowns, see the January 2010 first tuesday article, Cramdowns, cramdowns, cramdowns!]
Re: “FHA Short Refi program applications rise as major lenders come aboard” from Housing Wire