by The KCM Crew on September 7, 2010 ·

The current administration continues to attempt a myriad of policies aimed at bringing about a recovery in the housing industry. It is not their belief in the importance of homeownership that drives this policy. This administration has openly questioned whether the government should continue to support homeownership as an American ideal. Every policy had one purpose in mind: that stabilizing home prices would help stabilize the economy.

The purpose of the original stimulus package (the homebuyers’ tax credits, the lowering of interest rates by purchasing mortgage-back-securities, different modification programs) was to stabilize housing prices. It had nothing to do with getting families into homes or keeping families in their current homes. The government realized very early on that a recovery in housing would require a stabilization of values. Why? Because a large percentage of homeowners ‘walk away’ from their homes once they fall into a negative equity situation (where their home is worth less than the mortgage on the home). That would create more foreclosures and continue the cycle below:

The administration had to stop home prices from falling. Their ability to control prices would be determined by the theory of ‘supply and demand’. At first, they attempted to increase demand by lowering interest rates and providing tax incentives. They attempted to influence supply by controlling the flow of distressed properties coming to the market with an assortment of loan modification programs. These policies had a short-term positive impact on pricing. However, supply is again skyrocketing and demand seems to be plummeting.

The administration realizes that another drop in house prices will create a new group of homeowners who will fall further into a ‘negative equity’ position. That is why they have introduced the new FHA Short Refinance Option today. The purpose:

The FHA offers help to qualifying non-FHA borrowers who are “underwater” on their home loans. The FHA Short Refinance option is open to those who are current on their existing mortgage—but the lender must agree to forgive at least 10% of the unpaid principal on the original note.

The program’s intent is to prevent homeowners falling further into a negative equity. The Wall Street Journal posted frequently asked questions here.

Bottom Line

Will the program help families? We’re sure it will. If you qualify, jump on it. Will it help enough families to turn the housing market around?  We doubt it.

http://kcmblog.com/2010/09/07/walking-away-new-fha-short-refinance-option/#more-5778