Taken From Bloomberg Business Week

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Aug. 6 (Bloomberg) -- The Federal Housing Administration said it will begin accepting applications Sept. 7 for its program to help borrowers who owe more on their mortgages than their homes are worth.

The Short Refinance program, which the agency announced in March, encourages lenders to forgive 10 percent or more of the balance of a mortgage so the loans can be refinanced at a lower interest rate. That would remove the troubled loans from the lender's books and allow borrowers to lower their payments.

To qualify, the total principal in the new loan and any existing second loans must not exceed 115 percent of the property's value.

"We're throwing a lifeline out to those families who are current on their mortgage and are experiencing financial hardships because property values in their community have declined," FHA Commissioner David Stevens said in a statement today.

The agency estimated that 500,000 to 1.5 million borrowers would be able to refinance under the new program.

To qualify, borrowers must have a credit score of 500 or higher. Lenders who hold second mortgages on a property and agree to forgive debt can earn $500 for each successful refinance, the FHA said in a letter to lenders.

The program will be funded with up to $14 billion from the Troubled Asset Relief Program, which is meant to cover the lender incentives and any losses on the new loans. Congress authorized the $700 billion TARP in October 2008 to inject capital into the banking system amid fears of a collapse.

Market Motivation

The program will give lenders a way to cap losses on distressed loans while helping borrowers shed high interest rates, said David Berenbaum, chief program officer for the National Community Reinvestment Coalition, a Washington-based advocacy group for lower-income neighborhoods.

"In essence the lender is transferring the loan to FHA," Berenbaum said. "There may be some market motivation on the part of investors because they're getting some return on the portfolio and they're limiting the risk."

The FHA's program is part of a package of plans by the administration of President Barack Obama designed to help distressed homeowners. The U.S. Treasury's Home Affordable Modification Program, which offers mortgage workouts to distressed homeowners with loans guaranteed by Fannie Mae and Freddie Mac, in coming weeks will begin providing incentives to lenders who write down loan principal.

The FHA, which provides a government guarantee on mortgages with low downpayments, has experienced a rise in loan volume since 2006 as private lenders have withdrawn from the real estate market. The agency insures about a third of new single- family mortgages.