The Federal Housing Administration is making it easier for existing FHA borrowers to qualify for a streamline refinancing while capping increases in the loan amount.
FHA has revised the 'net benefit test' allowing more borrowers to lower their principal and interest payments even through they are facing higher taxes and insurance payments.
The government insurer also is putting the brakes on lenders packing closing costs, discount points, prepaid items, or other financing costs into the loan amount.
Lenders "must not use an appraisal" to increase the loan amount beyond the upfront mortgage insurance premium, according to Mortgagee Letter (2011-11) issued on Monday.
These changes go into effect in 60 days.
FHA's portfolio of streamline refinancings is plagued by high early default rates and negative equity.
Many borrowers with subprime and exotic mortgages refinanced into FHA-insured loans in 2008 and quickly jumped to a streamline refinancing in 2009 to take advantage of lower mortgage rates.
FHA completed 329,400 streamline refinancings in the fiscal year that ended September 30, 2009 and within six months 5.5% of the loans were 90-days or more past due.
FHA clamped down on streamline refinancings in January 2010 to establish new requirements for loan seasoning, payment history, income verification and net benefit test.
