GAO: Investors Eyeing New FHA Aid for Underwater Loans

Mortgage investors are very interested in a refinancing program the Federal Housing Administration plans to roll out this fall to help underwater borrowers with non-FHA loans, according to a Government Accountability Office report. However, the GAO auditors also found that the investors don't believe many borrowers will qualify for this principal reduction program. The aim of the new program is to prevent strategic defaults by giving investors an incentive to reduce the principal amount of the first and second mortgages. The new refinance option requires servicers to write down the principal amount of the first mortgage by at least 10%. The loan-to-value ratio on the newly originated FHA mortgage cannot exceed 97.75%. If there is a second lien on the property, the combined LTV cannot exceed 115%. "Investors we spoke with supported the principal reduction in conjunction with an FHA refinance," the GAO report says. "However, they also noted that the program might reach only a limited number of borrowers as it would only help borrowers who are current on their existing first-lien mortgage payments," the report says. After the refinancing, the borrower's mortgage payments cannot exceed 31% of income. And other debts cannot push the back-end ratio over 50% unless the borrower has a strong credit history. FHA officials did not respond to requests for comment on the GAO report.