To some distressed homeowners, hoping to benefit from a short pay refinance seems like chasing after the Holy Grail. To many people, the short pay re-fi makes sense. Reduce the principle of the loan and adjust the rate instead of letting house sink into foreclosure. However, as with everything these days ideas and programs involving the government, banks and investors even good ideas don’t come to fruition.
When various banks as well as Federal Housing Administration (FHA) made a big deal last September about the announcement of the short pay re-fi distressed homeowners had reason to think positive. The idea behind the program is that the borrower’s existing first-lien holder must agree to write at least 10% of the unpaid principal balance, and it must bring the borrower’s combined loan-to-value ratio to no more than 115%.
The program sounded even better when last September JPMorgan analysts estimated that 1.1 million mortgages could be eligible for the program. The problem is that the program is voluntary and now no one wants to do them. Why not? Too much risk.
The issue looms as kind of a Catch-22 because the servicer must prove to the investor that the loan is in imminent default and few servicers will be willing to go onto a limb and target a consistent current borrower as in danger of default. To qualify, homeowners must be current on their payments.
We got word late last year and reconfirmed again that Bank of America will not participate in this program. HUD has not released the names of any specific lenders associated with this program. However, we understand that other lenders do intend to participate. Also, Wells Fargo and Ally have said they intend to participate through pilot programs.
Again, lots of talk. We will keep an eye on this program, and when a significant amount of banks actually do some write-downs then we will report on it.