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FHA Refinance Program Offers Short Sale Alternative

As many as 1.5 million homeowners with underwater mortgages are being targeted in a new refinancing effort by the Federal Housing Administration (FHA), aimed at keeping more borrowers from losing their homes in short sales.

Launched last week, the $14-billion program is funded by the Troubled Asset Relief Program (TARP) and will be available to non-FHA borrowers, provided they have good credit and are current in their mortgage.

Under the program, an underwater mortgage - one wherein the balance is greater than the home's market value - will be refinanced into an FHA loan, with lenders and lien holders required to forgive at least 10% of the principal.

Real estate data provider CoreLogic reported that over 23% of homes in a mortgage nationwide are underwater. However, experts believe the program can only help a small percentage of these borrowers, as it only works for those who haven't missed payments.

Many have also pointed out that the requirements, which include a credit score of at least 500 and a non-FHA insured mortgage, do not apply to a large majority of Fannie Mae and Freddie Mac borrowers.

The program aims to help more borrowers stay in their homes instead of giving in to foreclosure or selling short, especially after they have been denied other workout options such as conventional refinancing and loan modification.

Hard-hit states such as Nevada, Arizona, and California are expected to benefit the most from the refinance program, as they have an over 50% share of underwater homeowners and thus a better chance of having qualified borrowers.