Skip to main content

Use Hardest Hit Funds to Enable New Refinancing for Underwater Homeowners

Pam Marron
Feb 02, 2016

Millions of underwater mortgages still exist
There are still 6.9 million underwater homeowners in the United States. Nearly 1.8 million of these homeowners have an interest-only Home Equity Line of Credit (HELOC) that is resetting to fully amortized payments over the next four years. Most of these homeowners are unable to obtain new refinancing because there is no refinance available for non-government-sponsored enterprise (GSE) conventional mortgages,1 or for second mortgages2 or HELOCs that are underwater.

There is a way to provide refinancing for these homeowners. Use Hardest Hit Funds as a new second mortgage that would cover a pay down to a loan size for an FHA Short Refinance,3 available for all loan types except FHA, and for loans in a negative equity position.

Use Hardest Hit Funds to cover a refinanced pay down to the FHA Short Refinance, a loan available for non-FHA mortgages that have negative equity, to a loan-to-value (LTV) of 97.75 percent for underwater non-GSE first mortgage holders. Then, use Hardest Hit Funds as a new second mortgage for over 1.8 million HELOCs, many that are interest-only, and for high rate second mortgages unable to be refinanced due to negative equity.

Why use Hardest Hit Funds?
There is no cap on the combined loan-to-value (CLTV) when government entity funds are used for secondary financing.

Question on pay down, but no maximum CLTV is the key to new refinance
The FHA Short Refinance has one criteria that is the reason you don’t see this loan often. The current lender must agree to pay down 10 percent of the loan balance in order for this loan to be put in place.

A question arises on if another entity could pay down the 10 percent. In the recently revised HUD 4155.1,4 under Short Payoffs:

For instances where the existing note holders5 are reluctant to write down indebtedness, a new subordinate lien may be executed for the amount by which the payoff is short. This reference is not stated again in the new FHA Handbook 4000.1 and under Write-off it states that the existing first lien holder must write off at least 10 percent of the unpaid principal balance.6

Putting aside the question on how the 10 percent principal reduction might be paid, it is clear in HUD Mortgagee Letters 2013-14 and 2014-23 that HUD allows the use of proceeds from federal, state or local government entities to extinguish a portion of negative equity. The valuable detail is that when second liens are extended and held by government entities, there is no maximum CLTV ratio. The FHA Short Refinance has a 115 percent cap on maximum CLTV, but no maximum CLTV ratio for second liens when held by governmental entities or instrumentalities of government. Hardest Hit Funds, an instrument of the government, could be used for the pay down to a 97.75 percent LTV that the FHA Short Refinance requires.

There is also no maximum CLTV where secondary financing exists for the Fannie Mae DU REFI Plus, Freddie Mac Relief Refinance, FHA Streamline Refinance, VA Interest Rate Reduction Refinance Loan (IRRRL) and USDA refinance, and all allow for replacement refinancing of secondary mortgages. So risky secondary financing could be replaced with Hardest Hit Funds.

Why a closer look at unused Hardest Hit Funds is needed
Unused Hardest Hit Funds of $7.6 billion allocated in Feb. 2010 will go back to the U.S. Treasury on Dec. 31, 2017 when Hardest Hit Funds expire. Florida alone has more than a half-billion dollars still available in Hardest Hit Funds. Hardest Hit Funds are not included in the state budget, so they do not jeopardize other state programs.

The benefit for responsible underwater homeowners and Hardest Hit Funds
Offer a discounted rate for a shorter term of this new replacement second mortgage. Combining a lower rate with a shorter term is the quickest method to regain equity, and an amortization schedule can show when positive equity will return.

​►Homeowners must be current on their mortgage.

​►Restructures financing for sustainable combined first and secondary financing and keeps homeowners in homes, preventing more short sales in underwater areas.

Hardest Hit Funds
​►Use these funds as a replacement second mortgage, not principal forgiveness. Funds are paid back, replenishing this fund.

​►Applying funds as new secondary financing requires a smaller allocation of funds per eligible homeowner, allowing more to be served.

1—GSE: Government-sponsored enterprise loan, a conventional loan under Fannie Mae or Freddie Mac.

2—If HAMP received on first mortgage, HAMP Second Lien Modification Program (2MP) available for second mortgages on the same property (

3—Pages 412-414: Refinance of Borrowers in Negative Equity Positions Program (Short Refi) FHA Handbook 4000.1, 9/14/2015 (

4—FHA 4155.1 3.B.1.f/Short Payoffs: Page 7 (

5—Note holders: A person, a bank or organization that has lent money, for example in the form of a mortgage or bonds (

6—Page 414 of footnote #2.

Pam Marron (NMLS#: 246438) is senior loan originator with Innovative Mortgage Services Inc. (NMLS#: 250769) in Tampa Bay, Fla. She may be reached by phone at (727) 375-8986, e-mail [email protected] or visit, or

This article originally appeared in the January 2016 print edition of National Mortgage Professional Magazine.

Feb 02, 2016
CFPB Issues Guidance On AI In Credit Underwriting

Creditors must provide specific and accurate reasons for credit denials, even with complex AI models.

Sep 19, 2023
Intercontinental Exchange Completes Black Knight Acquisition; Births Dark Matter Technologies Under Constellation Software

Rich Gagliano takes the helm at Dark Matter Technologies, poised to lead the future of Empower LOS with a 1,300-strong team, blending startup agility with decades of industry experience.

Sep 18, 2023
FHFA Invites Public Engagement On Modernized Credit Score Transition

Stakeholder forums and listening sessions planned to ensure seamless rollout; extended timeline for bi-merge credit report requirement in play.

Sep 11, 2023
Desperation Drives Difficulty in Closing Mortgages in California

Analysis reveals California among top 20 toughest states for mortgage closures.

Sep 11, 2023
If You Build It, They Will Come

Ratings will go a long way toward growing the market for home equity-backed securities

Sep 07, 2023
Investors May Be Losing Interest In The Single-Family Rental Market

Rise in interest rates, drop in values have them pulling back in certain regions

Sep 07, 2023