One Third of FHA's Streamlined Refis Could Be Underwater

One third of the streamlined refinanced loans that the Federal Housing Administration insured in 2009 are probably underwater, according to a New York University economics professor. Professor Andrew Caplin and his colleagues at the National Bureau of Economic Research estimate that 33.4% of the 330,000 FHA loans refinanced through the streamlined process during the first nine months of 2009 started out with negative equity. The professor told a congressional panel that the federal mortgage insurance agency and its auditors are underestimating the number of FHA underwater mortgages and the default risk of those loans. FHA doesn't require new appraisals when an existing FHA loan is refinanced, provided borrowers are current on their payments. FHA simply records the value of the property on a streamlined refinancing at the original purchase price, which ignores any decline in home values. In addition, the auditors treat streamlined refinancings as new loans instead of loan modifications. "Misclassification of streamlined refinances not only compromises the [FHA] loss model, but also results in underestimation of underwater mortgages," the professor testified. The NBER economists used the Federal Housing Finance Agency housing price index to estimate the number of underwater loans. "With all other house price indexes, the proportion in negative equity is even higher," Mr. Caplin told the House Financial Services housing subcommittee.