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More Loan-Modification Options for the ‘Underwater’

STRUGGLING homeowners who owe more on their mortgages than their properties are worth have had few options to restructure their loans, but that may soon be changing for a few of them.


Six months after the Federal Housing Administration announced an $11 billion refinancing initiative for these “underwater” borrowers, nearly two dozen lenders have agreed to take part in a new loan modification program.

Two exceptions are Fannie Mae and Freddie Mac, the government buyers of loans, which will not allow loans that they still own to qualify for the program.

The F.H.A. program — called Short Refi — requires major concessions from lenders, which must agree to write off at least 10 percent of the principal balance, and from investors, who, if they own the mortgage, must also agree to the deal.

To qualify, homeowners must be current on their monthly mortgage payments and not already have an F.H.A. loan. The size of the new primary loan cannot be more than 97.75 percent of the current value of the property; refinanced loans for homeowners whose properties carry second liens cannot exceed 15 percent of the property value.

In late February, Wells Fargo and Ally Financial, formerly known as G.M.A.C., said that they had created test programs for the F.H.A. option. “We currently are conducting a small-scale pilot of the F.H.A. Short Refi program for loans in our owned portfolio,” said Tom Goyda, a Wells Fargo spokesman, in a statement, “to help us better understand which customers may benefit and qualify.”

Bank of America , Citibankand JPMorgan Chase are not participating in the program, according to spokesmen for them. “Without the participation of Fannie Mae and Freddie Mac,” said Terry H. Francisco of Bank of America, “we don’t believe the program can help a significant number of our borrowers.”

But Mark C. Rodgers, a spokesman for Citibank, said that his bank was “participating in a third-party pilot program along the same lines as the F.H.A. Short Refi program.” He declined to provide details.

The Department of Housing and Urban Development, which oversees the F.H.A., said this month that 23 lenders had signed on to the Short Refi program, though it will disclose only the names of the five lenders that have already restructured a total of 44 loans. They are: Wall Street Mortgage Bankers of Lake Success, N.Y.; 1st Alliance Lending of East Hartford, Conn.; Nationstar Mortgage of Lewisville, Tex.; E Mortgage Management of Haddon Township, N.J.; and Glacier Bank of Kalispell, Mont.

HUD estimated that 500,000 to 1.5 million borrowers could be eligible for the program.

Even so, it faces challenges in Congress; on Thursday, the House of Representatives voted to end it.

One mortgage expert, John Diiorio, the owner of 1st Alliance Lending, said that big banks were taking part behind the scenes, by referring homeowners to third-party lenders that could restructure their mortgages. He added that 1st Alliance had “several hundred F.H.A. Short Refi” loans in the pipeline.

Because the F.H.A. announced the program only last September, and because such loans take three to four months from start to finish, Mr. Diiorio said, the number of refinanced loans should increase in coming months. He said that, on average, 1st Alliance had negotiated a principal reduction of $86,000 on a $256,000 loan, a 33.5 percent cut, to $170,000.

But he said lenders and investors had agreed to reduce principal for only half of the loans he had worked on.

The refinanced borrower, Mr. Diiorio said, had to pay a slightly higher fixed rate, typically 6 or so percent. But he added that the financial impact was the same as a 5 percent rate on a higher-balance loan of $100,000, with less principal forgiven. “It seems counterintuitive,” he said, “but the economics work both for the consumer and for the lender.”

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