While the idea was admirable, the execution was a failure.
The idea of the FHA short refinance program was to give lenders some incentive to avoid foreclosing on distressed, underwater homeowners by refinancing them in to an FHA loan at the current market value of the home. The primary incentive was supposed to be that doing so would cost lenders less money than foreclosing.
Unfortunately, in practice banks were appalled at the idea of forgiving debt on a massive scale. Lenders were especially afraid that if they started granting short refinances to some borrowers it would open the flood gates and upside down borrowers all over the country would start intentionally defaulting on their loans in or to get a principal reduction. Because the FHA short refinance program was voluntary and only offered very minor incentives for lender participation, the program was dead on arrival. Some large lenders have granted some token principal reductions as part of the large settlement they agreed to with the federal government, but overall the FHA short refinance program never got off the ground.
However the good news is there are several very useful government-backed refinance programs for upside down borrowers that did gain traction. While they aren’t principal reductions, the programs that are up and running can massively reduce interest rates and monthly payments for borrowers. Contact us in the sidebar today to learn more.