There have been quite a few news stories about the federal government’s latest effort to help homeowners avoid foreclosure. The program is called “Short Finance” and it’s designed to help people who couldn’t qualify for the Obama administration’s earlier program called Home Affordable Modification Program or HAMP.
Short Finance would effectively replace private mortgages with a new FHA backed mortgage for a lower amount. This could help some individuals stay in their homes. The new federal mortgage would reflect the home’s present value rather than the value of the older mortgage.
The big problem with this program is that not too many details are known about it at this time. Media reports indicate that short finance will be an effort for the government to take over mortgages that are “underwater.” A mortgage is underwater when the amount of money owed on a property exceeds the home’s value.
An example of this would be home that was valued at $500,000 and mortgaged for that amount in 2005. The house is now worth $300,000 because of the economic downturn but it is still mortgaged for $500,000. If the owner lost was unable to make the payments she would not be able to pay off the mortgage by simply selling the house.
Property values in many parts of the country have declined dramatically in the last few years. This has left many homeowners stuck with large mortgages they can’t pay and homes they can’t sell. The thinking behind Short Finance is letting the federal government takeover underwater mortgages would help the mortgage market recover.
How Short Finance Could Help Homeowners
The main way Fhort Finance could help homeowners would be to reduce the principal of the mortgage to a smaller amount that would be easier to pay off. In most cases the mortgage principal would be reduced to 97.75% of the home’s current value.
This would mean that the amount owed on a home worth $200,000 but mortgaged for $350,000 would be reduced to $191,500. This could obviously help a homeowner get out of a lot of mortgage debt.
For persons who can qualify for it, Short Finance sounds like a pretty good deal. Unfortunately there are restrictions on who can apply for it. Both the homeowner and the mortgage lender would have to agree to it. It is not clear what will happen if mortgage lenders don’t go along with this program or how many mortgage lenders are willing to join the program.
Lenders Might Not Go Along
Something that could hinder this program would be the refusal of mortgage lenders to go along with it. The Wall Street Journal has reported that some lenders might refuse to offer Short Finance because of fear they could be sued by investors who purchased mortgage backed securities.
Who Can Qualify for Short Finance
The major qualification for Short Finance is that a mortgage must be issued by a private mortgage lender. Mortgages from Freddie Mac and Fannie Mae and FHA backed mortgages will not be covered by this program. There are other programs such as HARP that are designed to help persons with those mortgages.
Other requirements are that the mortgage be on a person’s principal residence. Second homes and rental properties will not qualify for Short Finance.
Persons with second mortgages would be able to participate in Short Finance but the amount of the second mortgage can’t exceed 115% of the home. This program could help individuals who have more than one mortgage on their home.
This means that persons who didn’t qualify for HAMP could qualify for Short Finance. Some persons who qualified for HAMP could also participate in this program.
How much will it Cost?
The cost for Short Finance hasn’t been worked out but news reports indicate that persons who participate will pay transaction fees. The amount of these transactions fees hasn’t been determined yet.
Participants will also have to purchase to homeowner’s insurance which can be very costly. Anybody who gets an FHA backed mortgage is required to get homeowner’s insurance.
Some participants could also face an increase in federal income tax because the IRS does regard debt forgiveness as “income.” This could increase some people’s tax burden but this debt could be covered by the mortgage tax deduction.
A big drawback to this program is that Short Finance refinancing will be reported to the big three credit bureaus. This could lower a homeowner’s credit score and make it more difficult for them to get credit cards and mortgages in the future.
How to Apply
The details of this program haven’t been completely worked out yet. No announcements about how to apply for short finance have been made yet.
Persons interested in this program should fill out our Short Finance Form and speak to a mortgage broker. State housing authorities could also be of some help in applying for Short Finance.
Homeowners who are afraid of foreclosure should also contact their state housing authority. State housing authorities have programs to help persons facing foreclosure including no interest loans to pay mortgage payments with.