Administration Releases Service Member and Refinance Changes

FHA released Mortgagee Letter 2012-05 which expands the refinance with negative equity program.  This program has not been popular and perhaps some of the changes will make it more attractive for lenders. Until Congress Acts on the latest refinance proposal, this is just about the only option for refinancing “non-FHA and non-conforming” loans…

A Federal Housing Administration refinance program for negative-equity borrowers has been extended. In addition, several enhancements include the ability for delinquent borrowers to qualify, more flexible debt-to-income ratios and second-lien payoffs. Back in August 2010, the Department of Housing and Urban Development issued guidelines for a program that enables conventional borrowers with current loans and negative equity to qualify for an FHA-insured refinance if their existing first lender voluntarily agrees to at least a 10 percent principal reduction. The loan-to-value is capped at 97.75 percent, while the maximum combined LTV is limited to 115 percent. Minimum credit scores are 500. In Mortgagee Letter 2012-5, HUD has extended the life of the program until Dec. 31, 2014. Among other changes outlined in the bulletin is the ability for delinquent borrowers to successfully complete a trial payment plan in order to qualify. The amount of the trial payment should be based on the projected reduced loan balance at the maximum LTV or CLTV with a 30-year amortization and market FHA rates. Just three consecutive on-time payments are required. Borrowers who don’t make the three on-time payments can just start another trial payment plan. The variance between the trial payment amount and the final payments cannot exceed 6 percent. Another enhancement enables the payoff of second liens at the discretion of the first lien holder as long as the maximum LTVs are maintained. On loans that receive a “refer” risk classification from the TOTAL Mortgage Scorecard or a manual underwriting, the maximum front-end DTI ratio was raised to 35 percent from 31 percent. The back-end DTI ratio in these cases cannot exceed 48 percent. In addition, proceeds can be used to pay off seconds for the first time. Source: FHA and Mortgage Daily

In addition to the Administration’s announcement regarding FHA refinances, the President announced relief housing relief for veterans and service members. On top of the historic settlement completed by the Federal government and 49 state Attorneys General last month, major servicers will be providing significant relief to thousands of service members and veterans. Under the agreement, they will:

  • Conduct a review of every service member foreclosed upon since 2006 and provide any who were wrongly foreclosed upon with compensation equal to a minimum of lost equity, plus interest and $116,785;
  • Refund to service members money lost because they were wrongfully denied the opportunity to reduce their payments through lower interest rates;
  • Provide relief for service members who are forced to sell their homes for less than the amount they owe on their home loan due to a Permanent Change in Station;
  • Pay $10 million dollars into the Veterans Affairs fund that guarantees loans on favorable terms for veterans; and
  • Extend certain foreclosure protections afforded under the Service member Civil Relief Act to service members serving in harm’s way. Source: National Mortgage Professional

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