Can You Refinance With Negative Equity if the Home Is Not Freddie Mac or Fannie Mae?

Refinancing when you have negative equity in your home is a challenging task. Most mortgage lenders require that you have at least 20 percent equity in your residence before they'll approve you for a refinance. If you have negative equity -- meaning that you owe more on your mortgage loan than you owe -- you don't meet this requirement. Fortunately, there is a government program that can encourage lenders to refinance your home loan, even if you have negative equity and your loan is not owned or guaranteed by Fannie Mae or Freddie Mac.

To encourage mortgage lenders to refinance the loans of homeowners whose residences have fallen in value, the federal government launched its Home Affordable Refinance Program. This program provides financial bonuses to lenders who successfully refinance mortgage loans for homeowners with little, no or negative equity. To qualify for this program, though, homeowners must be paying off a mortgage loan owned or guaranteed by Fannie Mae or Freddie Mac. If you aren't paying off such a loan, though, you can still qualify for help from the federal government through a second program.

The FHA Refinance for Borrowers with Negative Equity, better known as the FHA Short Refinance, works in much the same way as does the Home Affordable Refinance Program. It, too, provides a financial incentive, this time to encourage lenders to refinance the home loans of owners who owe more on their mortgage loans than what their homes are worth. But this program is designed for those homeowners who don't have mortgage loans owned or guaranteed by Freddie Mac, Fannie Mae, the Federal Housing Administration, U.S. Department of Veterans Affairs or U.S. Department of Agriculture. The program also comes with one other bonus: Lenders participating in it must refinance the existing loans of homeowners into FHA-insured mortgages with principal balances of no more than 97.75 percent of the current market value of these owners' homes.

To participate in the FHA Short Refinance program, you must first meet certain requirements. You must owe more on your loan than what your home is worth and you must be current in your mortgage payments. The home you refinance must be your primary residence, and your total monthly debts can't equal more than 55 percent of your gross monthly income.

To refinance your mortgage through the FHA Short Refinance program, call your existing mortgage servicer, the company to which you are currently sending your mortgage payments. Not all servicers participate in the program. And even if your servicer does, it is not required to grant you a refinance through the program. If your mortgage servicer does offer the program, is willing to work with you and you meet all the program requirements, you'll start the process as you would any refinance, by filling out a Uniform Residential Loan Application. You'll also have to provide your lender copies of such financial documents as your last two paycheck stubs, last two years worth of income tax returns and last two months of bank account statements so that your lender can verify your income.

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.


Significance of Negative Return on Shareholders' Equity

Investors seek out opportunities in the market with the intention of securing a return, at least in the long-term. As a result, the return on equity ratio is usually carefully monitored by diligent investors, and most try to avoid opportunities where their return would be negative. Investors can help protect themselves from losses by learning about the causes of a negative return and the risks or opportunities it may present.

Shareholder's equity is the term investors use for all of the money that a business owes to its owners -- the total amount invested in the business. Return on equity is a calculation that investors use to assess the performance of this investment. It is figured by taking the company's net earnings -- remaining revenues after subtracting expenses -- as a percentage of the total amount invested in the company. For example, a company that has a total equity investment of $100,000 and a net earnings of $8,000 would post an 8 percent return on equity.

When a business's return on equity is negative, it means its shareholders are losing, rather than gaining, value. This is usually a very bad sign for investors and managers try to avoid a negative return as aggressively as possible. Most investors avoid placing their money in a company that fails to consistently deliver positive returns, but investors may overlook a negative return for a single tough year if they believe the company is well-positioned for long-term growth.

While a negative return is rarely desired, it's sometimes important to determine the causes of a negative return if possible. Most companies actually post a negative return in their early years, due mainly to the significant costs of start-ups, including capital expenditures -- investments in equipment and other major assets. Economic downturns and recessions can temper demand from a company's customers, and even well-managed companies might post negative returns on equity if the larger economy is in trouble. To understand the impact of larger economic trends on a company's equity, it is important to compare their performance with that of similar companies.

Depending on the underlying causes of a negative return, poor performance may be an indicator of inefficient management or an ineffective business model. Looking at long-term performance trends -- whether the company has consistently grown its return on equity, or if it has decreased it over time -- can help to determine long-term growth potential. In some cases, a company with a negative return could be a good opportunity, if other aspects of its financial situation show the prospect of longer-term growth. Finally, a negative return is usually reflected in a company's stock price, as there is less demand for shares of a company that cannot generate a positive return.


Financing calcs: How to deal with very low/negative equity and dividend impacts, etc.

Negative equity refinance

Negative equity refinanceThis question pertains to many classic financial calculations -- ROE, average shareholder equity, DuPont models, debt to equity ratio, etc. These formulae are fairly easy to interpret and apply for the average company in reasonable health. But generally, how do you deal with such oddball situations as negative equity -- now or in one or two previous periods. e.g. a profitable company should have great ratios, but what if dividends strip all equity on a regular basis, or even take equity negative. Company is still a healthy cash machine. How do these formulae play out then?

e.g. equity at Jan 1 is $2mm; equity at Dec 31 is minus $0.5mm, due to profits less paid dividends being more than $2mm negative, then what is "average shareholder equity"? Or what if equity went negative due to a minority interest buyout at a premium over equity book value, etc. Standard formulae do not apply that easily.

What is the debt to equity ratio if debt is $1mm and the equity is minus $0.25mm?

Similarly for historical losses, -- how do you measure a company's past profitability ratios if they had, say, 5 profit years and 2 loss years -- netting off does not necessarily produce a realistic answer for valuation purposes.

The answers could be long -- but generally, how do you deal with such situations? Does one just assume that standard financial calcs no longer apply? I always wondered if finance students ask such questions in a high level finance class.