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Originally published Friday, March 9, 2012 at 8:01 PM

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More federal refinancing help for homeowners with FHA loans

As many as 3 million homeowners may be able to refinance into lower-cost loans under the new program that would slash mortgage-insurance premiums.

San Francisco Chronicle

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As many as 3 million homeowners may be able to refinance into lower-cost loans under a new federal housing program, even if they owe more on their loans than their homes are worth.

The Federal Housing Administration announced Tuesday it would slash mortgage-insurance premiums for certain homeowners who refinance an existing FHA loan into a new one, under the streamlined program.

To qualify, a homeowner must be current on a mortgage taken out and insured by FHA before June 1, 2009. Current means no more than one 30-day late payment in the past six months and no more than two such late payments in the past year.

The current loan must be refinanced into a new FHA-backed mortgage on or after June 11. The new lender is not required to verify a homeowner's income, employment or credit score. And no appraisal is required, so homeowners can be underwater on their mortgages.

The inability of underwater homeowners to refinance their loans has contributed to the housing market's lackluster recovery. The FHA fee reduction does not require congressional approval, but it comes amid concerns that the FHA's insurance fund could run out of money and need a bailout.

Under the new program, those who qualify will pay mortgage-insurance premiums of 0.01 percent of the loan balance up front, plus 0.55 percent per year. The fees are a drastic reduction from what other FHA borrowers are paying today — and an even bigger discount on what they will be paying in a few months.

FHA now charges 1 percent of the loan balance up front, plus 1.1 or 1.15 percent per year (depending on loan-to-value ratio) on 30-year loans. On April 9, it will increase the upfront premium to 1.75 percent and will raise the annual premium on new loans by 0.1 percentage point.

On June 11, it also will raise the annual premium on new loans that exceed $625,000.

The administration estimates that 2 million to 3 million homeowners could be eligible to refinance under the reduced fees.

Housing and Urban Development Secretary Shaun Donovan said the fee reduction would result in "tens of millions of dollars"in lost revenue over the short term and "hundreds of millions of dollars"over a few years.

But, he said, those sums are small compared with the billions of dollars other new loans are expected to bring in. In the long run, he added, refinancing will reduce monthly payments, making families less likely to default.

He added that the economy could get a boost if the average family spends the money it saves on its mortgage.

A HUD spokesman said the cutoff date of June 1, 2009, was chosen to make the program consistent with the government's Home Affordable Refinance Program for Fannie Mae and Freddie Mac loans.

Ed Pinto, a resident fellow with the American Enterprise Institute, a conservative think tank in Washington, D.C., said the main problem with the plan — and with the government's previous refinancing programs — is that "they avoid tackling the basic problem. These homeowners are underwater. They haven't built up any equity."

If you refinance a 30-year mortgage with 25 years remaining into a new 30-year loan, you reduce the monthly payment, which gives the homeowner money to spend at Wal-Mart. But he remains just as underwater as he was before, Pinto said.

Military families also are in line for new housing aid from the government.

The Obama administration also said Tuesday that the recent settlement between state and federal regulators and five big mortgage servicers has been expanded to provide potentially large payments to service members who were "wrongly foreclosed upon." The servicers are Bank of America, Wells Fargo, JPMorgan Chase, Citibank and Ally Bank, formerly GMAC.

Some service members will receive compensation for lost equity, plus interest, and a $116,785 payment.

Service members charged interest rates of over 6 percent who qualified for lower rates during the past four years also will be compensated. They'll be paid at least four times the amount they were wrongfully charged.

Service members who think their rights were violated can call the Justice Department at 800-896-7743.

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