Big Banks Accept FHA Short Refinance

By:: Kara Johnson | March 15, 2011

The nation’s five largest mortgage servicers have all agreed to participate in FHA’s Short Refinance Program for underwater borrowers, providing a major boost to the struggling program.

Bank of America, Wells Fargo, JP Morgan Chase, Citigroup and Ally Financial/GMAC are all participating in the new program, according to spokespeople for HUD and JP Morgan Chase.

The program enables homeowners in underwater mortgages to refinance out of a current, privately held mortgage and into an FHA mortgage with neutral or slightly positive equity. The lender currently holding the mortgage must agree to write down the excess principal on the mortgage, with the government covering part of the cost.

The news comes only a few days after the House of Representatives voted to kill the program on a near party-line vote. Republicans have criticized the $8 billion program as ineffective, noting that only 44 homeowners had been approved for assistance by mid-February, following the program launch in September.

The Obama administration has defended the program as still getting up and running, with bringing the major lenders on board as part of the issue, along with the need to develop procedures and infrastructure. In fact, the number of homeowners assisted under the program has more than doubled over the past month.

For lenders, the program offers to opportunity to get rid of a risky mortgage while recovering much of what they’re owed, and likely more than what they would get for the property in foreclosure. For financially pressed homeowners, it offers a chance to reduce their mortgage debt to a more manageable level and start building positive equity in the property again.

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