The Federal Housing Administration has landed two big lenders to adopt its principal reduction program which helps underwater homeowners refinance into new FHA-insured loans.
Treasury secretary Timothy Geithner and HUD secretary Shaun Donovan have been pressing CEOs of some the largest mortgage banking firms to implement its 'short' refinancing program.
FHA chief David Stevens this week told a congressional panel that a "couple of the large ones are actually building up the capacity to roll out the program." (He did not identify the lenders, however.)
The biggest funders of FHA loans include: Wells Fargo & Co., Bank of America, JPMorgan Chase, and Citigroup.
He noted that 27% of homeowners with a mortgage are underwater and that more lenders are needed to participate in the program for it to have a real impact.
FHA designed the program to refinance conventional mortgages that Fannie Mae and Freddie Mac guarantee. Borrowers must be current on their loan to qualify for a refinancing.
The short refi program requires servicers to write down the principal amount by at least 10%, allowing the loan to be refinanced into a standard, fully underwritten FHA mortgage with a 97.75% loan-to-value ratio. This refinancing will "right-size" the mortgage, creating equity for the borrower.
The short refi also lowers the borrower's mortgage payments and gives him/her the opportunity to sell the house, if feasible, without wrecking their credit score.
"We believe that principal write down is absolutely needed," said Stevens.
