Help for homeowners who haven't missed a payment

Borrowers who are up-to-date with their payments but have seen their home's value drop way below their loan amount could get help from a new government program. The Federal Housing Administration Tuesday debuted its FHA Short Refinance option, which allows non-FHA borrowers to get into an FHA-backed loan worth no more than 97.75% of the home's value.

The catch? The homeowner's lender must be willing to write off at least 10% of the principal balance, and the total debt tied to the house can be no more than 115% of its value. The Obama administration says this program, which was announced in March, could help between 500,000 and 1.5 million homeowners. But industry observers are not so sure.

"Given massive failures of similar programs in the past, there is healthy skepticism on the success of this program," said Sandeep Bordia, analyst at Barclays Capital, who expects no more than 300,000 homeowners to benefit. Banks, which have been reluctant to write off principal, may not see the need to take an upfront loss on a loan where the homeowner is current with payments, Bordia wrote in a report. Also, it may be difficult to get the owner of the second lien to agree to write down the balance.

Another limiting factor is that borrowers must have a mortgage debt-to-income ratio of less than 31% and to total debt-to-income ratio of less than 50% after the refinance. Homeowners with relatively little debt are much less likely to default, Credit Suisse Analyst Chandrajit Bhattacharya wrote in a report.

"We think servicers would rather take their chances and hope that the borrower keeps paying," said Bhattacharya, who estimates 400,000 people will be helped at most. "In any case, if the borrower defaults in the future, servicers can always make a modification offer."

The FHA Short Refinance initiative follows the FHA Secure and Hope For Homeowners programs, both of which tried to use the federal housing program to combat the housing crisis. Not many homeowners signed up for these efforts.

Click here. For more information regarding a Short Refinance.