HUD’s issuance of Mortgagee Letter 2009-32, Revised Streamline Refinance Transactions today may have effectively put an end to a popular program for FHA borrowers – the “No-Cost” FHA Streamline Refinance.
For years, millions of home owners with FHA loans have taken advantage of the opportunity to refinance their mortgage to a lower interest rate without having to pay out-of-pocket closing costs and without having to have their homes appraised. In truth, there is no such thing as a “no cost” refinance; rather, the transaction is one of the following scenarios:
- The closing costs related to the streamline refinance are financed into the loan balance (no “out-of-pocket” costs).
- The closing costs are not charged by the lender but the borrower receives an interest rate that is higher than the current market rate (the cost is spread throughout the life of the loan in the form of a higher monthly payment).
- The closing costs are offset — in part or in total — by the refund of the upfront mortgage insurance premium from the loan being paid off (opportunity cost).
- A mixture of all three of the above.
- Or, the FHA streamline refinance is not “no cost” and the borrower pays the closing costs at closing.
It should be mentioned that another cost is the fact that in almost all cases, the loan term is reset to 30 years.
In any of the above situations, the home owner has to determine if the benefit of the refinance warrants the cost. He (she) might ask himself, “Is it worth it to me to increase my loan balance by $3500.00 if I save $120 a month?” or ”How long am I going to live in this house? If it takes me 29 months to recuperate my costs, will I be here long enough to benefit from the savings?”
Many times the decision has been made much easier because of the fact that the closing costs were not coming out of pocket. Quite frankly, the decision for many is based, in large part, on current cash flow needs. For many home owners, the ability to reduce their monthly bills and “skip” a month’s payment (remember, I said “cash flow”) has been worth the financed closing costs.
Unfortunately, this fact has also created a slew of loan officers that are happily willing to streamline home owners over and over again to help them decrease their interest rate by a nominal amount without concern or care. They hide, avoid and/or neglect the fact that the costs probably outweigh the benefits. All the while, they are putting the home owner and FHA at risk.
How does it put the home owner at risk? Each time they increase their loan balance, they leverage their house more and increase their exposure.
How does it put FHA at risk? FHA insures each loan so when the loan balance goes up, the amount that FHA is insuring goes up. It may not seem like a big deal that they insure $3500 more … until you multiply that number by 2 million (the approximate number of loan applications FHA received in fiscal year 2008).
This is why FHA made the streamline refinance revisions that they announced today; to reduce their risk, protect less-than-knowledgeable home owners from unscrupulous loan officers, and make those who really will benefit from the streamline program have some skin in the game.
Over the next few years, this will help FHA reduce its exposure by eliminating streamline refinances for houses that are upside down in value if the borrowers aren’t willing and able to pay for their closing costs out of pocket. However, many homeowners who really need and deserve the benefits of the “no cost” streamline refinance will unfortunately lose their opportunity.
In the long-run, home owners will regain their access to the benefits of the “no cost” streamline refinance when property values start to increase again and rebuild equity.
Review of the Key Revisions:
Revisions Made To Reduce Risk to Home Owners
1) The result of the streamline refinance transaction must have a net tangible benefit is defined as:
- reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens),
- refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage,
or
- reducing the term of the mortgage.
The new total mortgage payment must be 5 percent lower than the total mortgage payment for the mortgage being refinanced.
This requirement is applicable when refinancing from a Fixed Rate to Fixed Rate, from an ARM to ARM, from a Graduated Payment Mortgage (GPM) to Fixed Rate, from GPM to ARM, from a 203(k) to 203(b) and from a 235 to 203(b).
Revisions Made To Reduce Risk to FHA
1) At the time of the loan application, the borrower mus have made at least 6 payments on the FHA loan being refinanced. If they have less than 12 months payment history, they can never have been late. If they have over 12 months of payment history, they can only have one late in the past 12 months and none in the most recent three months.
2) The lender must certify that the borrower is employed and has income at the time of loan application.
3) If assets are needed to close, the lender must verify and document those assets.
4) If a credit score is available, the lender must enter the credit score.
5) If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent.
- For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property.
- For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.
6) If the transaction is a streamline refinance WITHOUT an appraisal, closing costs can not be financed into the loan amount.
7) If the transaction is a streamline refinance WITH an appraisal, the maximum loan amount is the lower of:
- Outstanding principal balance minus the applicable refund of the upfront mortgage insurance premium, plus closing costs, prepaid items to establish the escrow account and the new upfront mortgage insurance premium that will be charged on the refinance;
or
- 97.75 percent of the appraised value of the property plus the new upfront mortgage insurance premium that will be charged on the refinance.
8 ) Discount points may not be included in the new mortgage. If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.
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