MORTGAGE LOAN COMPLIANCE®

To help underwater homeowners, the Federal Housing Administration’s new policy makes an exception for conventional borrowers who want to take advantage of a new FHA Short Refinance program — which requires the loan holder to write down the value of the loan by at least 10%.

For short refinances, the Combined-Loan-To-Value (CLTV) is 115%. FHA issued mortgagee letter (2010-23) for the FHA Short Refinance program last Friday. The new refi program goes into effect September 7, 2010.

FHA reserves the highest CLTV for streamline refinances of existing FHA borrowers. For a streamline refi, the maximum CLTV is 125%.

The previous Bush administration dropped FHA's CLTV restrictions entirely in 2007 to allow lenders to refinance strapped subprime borrowers. Now the Federal Housing Administration is clamping down on refinancing where a second lien is involved.

The maximum combined loan-to-value ratio for a rate-and-term refinance will fall to 97.85% starting in September compared to the current "unlimited" LTV.

On cash-out refinances, the maximum CLTV is 85%, according to Mortgagee Letter 2010-24, which was issued on Friday. "This Mortgagee Letter eliminates the unlimited CLTV ratio" that was first introduced in 2007, FHA said.

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