The Ability To Refinance An FHA Loan Just Took A Sudden Turn For The Worse
A sudden and unforeseen shift in the ability for lenders to fund FHA Streamline Refinance loans will have a huge negative impact on borrowers who have older FHA loans FHA loans. And for the first time, the change was caused not by FHA changing their guidelines, but by a major investor turning off access to the funds lenders need to close these loans.
Virtually all home loans being made in the U.S. right now are funded via commercial lines of credit or some similar short term financing mechanism. Lenders close the loan using funds from a larger investor, package up your file to sell to Fannie Mae or Freddie Mac, and then pay down the revolving line to the investor with the proceeds from the sale.
HARP (the loan program for underwater homeowners) was the first loan program I’ve seen to suffer restrictive guidelines from the investors which diverted pretty far from the program guidelines issued by Fannie Mae and Freddie Mac. This is why so many people are having a hard time getting their loans approved under HARP. The Making Home Affordable website promises all these great program features, but the lenders have been unable to get their investors to provide the funds without severe restrictions.
This investor restriction problem has now hit the FHA Streamline Refinance program. The main benefit of the program was that existing FHA borrowers could refinance to a lower rate without an appraisal and without a full credit report. All FHA really cares about is that you have paid your mortgage on time and that you will be improving your situation by refinancing. FHA already has the risk of guaranteeing your loan regardless the current value of your home or how you pay your other bills so there’s really no additional risk being assumed by allowing you to lower your payment.
For some reason the major investor for this mortgage product abruptly announced this week that they were no longer going to provide the funds lenders need to close these. That started a ripple effect and the other major investors were left wondering what scared the first investor away, and now they have pulled back as well.
Overnight lenders virtually ceased offering the FHA Streamline as currently designed. Some companies, like ours, have come out with interim guidelines (more restrictive), but it is clear additional restrictions will be forthcoming.
The biggest change is that until further notice we are no longer able to process a Streamline without a property value being determined, and the new loan cannot exceed 110% of that value. Unfortunately this is going to raise the cost to the consumer and add a huge element of uncertainty over whether you can get the loan or not. I did a rough calculation assuming that someone financed a $200,000 home with an FHA loan 3 years ago. If the value has decreased more than about 13%, then the borrower would be dangerously close to that 110% ceiling and possibly unable to refinance.
This change to the FHA Streamline program will not impact many borrowers, but for those it does the impact has the potential to prevent them from refinancing to a lower interest rate. What’s most disturbing about this change is that it’s really the first time that a mainstream loan program was altered not by its governing agency (FHA) but by the actions of a funding source. I’m surprised that with us being this far removed from the summer of 2008 financial credit freeze that we are seeing actions like this.
Michael has 21 years’ experience in the lending industry. In that time he’s directly helped over 1,400 families finance the purchase of a new home or refinance an existing loan. Rebecca has a CPA background in auditing financial institutions which brings an incredible resource to First Priority Financial. They are licensed to help families in the states of WA and CA. If you, or anyone you know, needs help with a home loan call 509-252-9151 or send an email to Mike Mullin