According to the National Association of Realtors and the Associated Press, the Federal Housing Administration announced the latest government program to help underwater borrowers.

As of Tuesday, September 7, 2010, the Federal Housing Administration will allow lenders to select which of their borrowers can participate in this new plan. The borrowers that investors and banks choose will most likely be borrowers who are expected to default anyway.

The FHA offers help to qualifying non-FHA borrowers who are "underwater" on their home loans. The FHA Short Refinance option is open to those who are current on their existing mortgage, but the lender must agree to forgive at least 10% of the unpaid principal on the original note to bring the combined loan-to-value ratio to a maximum 115%. The new FHA-guaranteed loan must have a loan-to-value ratio of no more than 97.75%.

What's the catch? Non-FHA borrowers who meet these guidelines and additional credit qualifications are allowed to apply to refinance into new FHA-insured home loan. Requirements for this program consist of the following; the borrower must be current on all mortgage payments and they must qualify for the FHA Short Refinance program by having a credit score of 500 or better and meet other typical FHA loan prerequisites. For more information on these guidelines visit the Federal Housing Administration website at: http://www.fha.com/fha_article.cfm?id=169.

It's also important to note that this program is not automatically open to homeowners who are underwater on conventional home loans. FHA Short Refinancing is only for borrowers who are underwater on properties that are considered the borrower's primary residence and is intended only for those with non-FHA guaranteed home loans. Due to declining property values, borrowers who are "underwater" on conventional home loans are basically stuck with properties that aren't worth as much as the amount owed on those notes. In addition, the FHA Short Refinance program is voluntary and "requires the cooperation of all lien holders". This could be a potential problem for borrowers hoping to qualify as lien holders continue to fight for lost dollars.

According to the FHA, the program is expected to help as many as four million homeowners through the end of 2012. Other sources state estimates that between 500,000 and 1.5 million borrowers will be helped, but analysts at Barclays Capital say they doubt whether the program will reach 300,000 borrowers.

How likely is it that this program will succeed? Critics speculate that foreclosures are still coming down the pipeline and it could be too little, too late. Only time will tell, as we approach the fall and winter market. We will continue to watch this program and update you on any important news. In the meantime, please contact us at (858) 204-5700 for all your real estate needs. We also appreciate your referrals!