As you may have already read at this site, FHA loans and VA loans have a process called “streamline refinances“. The great thing about streamline refinances is that as long as a borrower has remained current on their mortgage they can refinance to a lower rate with better terms even when they a underwater/upside down on their property (read: owe more than the home is currently worth). The problem is that streamlines currently only apply to FHA and VA loans. But that may be changing. Here is a quote from a recent Bloomberg article:
If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit? Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”
Streamline refinances only apply to rate-term refinances; not to cash out refinances. The logic is pretty simple — if a borrower can stay completely current at a 6.5% interest rate that borrower should be a safe bet at a 6% interest rate as well. But a major difference between FHA/VA loans and Fannie and Freddie loans is the mortgage insurance. With the former the government insures the loans and collects premiums and with the latter private mortgage insurance companies insure loans of more than 80% of the value of the home. Paul Jackson over at Housing Wire said this about that:
The kink here is that in the case of the FHA, the government has underwritten any insurance on the loan; in the case of the GSEs, any mortgage insurance is underwritten by a private party, and so ultimately the FHFA would be working with a number of PMI providers to implement a rate and term streamlined refinancing program. The question, of course, is whether it makes financial sense to permit streamlined refis during a time when property values are still falling rapidly.
We’ll see if this idea comes to fruition. It does sound like it might be a useful arrow in the quiver of the federal government as it battles this housing crisis. It won’t help people who have fallen behind on their mortgage already but it might prevent more people from falling behind in the future.