Underwater Mortgage Assistance–Will Lack Of Participation By Fannie Mae And Freddie Mac Hurt FHA Short Refinance Program?

A report on Housingwire.com has indicated that mortgage institutions Fannie Mae and Freddie Mac may be unwilling to change their policy on underwater mortgage assistance through principal reduction programs. Fannie Mae and Freddie Mac were being prompted to participate in the FHA’s short refinance program, but there are some who feel that this change in practices when dealing with underwater home loans may not come about for Fannie or Freddie.

The FHA’s short refinance program was essentially established as a way to allow underwater homeowners who are current on their mortgage the opportunity to refinance into an FHA home loan, provided their mortgage servicer reduced their mortgage principal. There were many who had a negative view on the initial launch of the Federal Housing Administration’s underwater assistance program, as it did require financial institutions that serviced mortgages to write down principal balances for certain homeowners.

Obviously, in cases where a homeowner is current on their mortgage and can afford an underwater payment, the incentive for financial institutions to reduce a homeowner’s principle have been low and, as a result, there have been a few participants in this underwater initiative. There were those who believe that if Fannie Mae and Freddie Mac begin to offer more FHA short refinance principal reductions, and essentially hand off these mortgages to the FHA as a result, other financial institutions might follow.

However, some homeowners have deemed principal reductions as necessary due to the fact that their underwater situation has become so dire, but there are still other homeowners who feel that reducing a homeowner’s principal is, simply, unfair. There are no guarantees that home prices will appreciate over the years, and in cases where homeowners have lost value, individuals against principal reductions feel that this is simply a potential part of being a homeowner.

On the other hand, homeowners who have seen severe decreases in their property’s value often argue that their home price was inflated and, as a result, have requested principal reductions. Also, concerns over the losses that would be felt by servicers forgiving principal amounts and, in the case of the FHA short refinance program, handing off these mortgages, could have adverse effects for servicers and investors.

Yet, there do still remain in place certain underwater assistance programs which can help with the affordability of a homeowner’s underwater mortgage. While principal reductions are not easily obtained, homeowners who are simply looking for a more affordable payment on their underwater mortgage do have modification programs available and, in certain cases, underwater refinancing plans even though they may come without a principle reduction.