At least 20 lenders are participating in FHA's principal reduction program to refinance underwater borrowers with two major lender/servicers launching pilot programs of their own, according to Federal Housing Commissioner David Stevens.

The FHA chief told a congressional panel that Wells Fargo and GMAC/Residential Capital Corp. soon will begin FHA Short Refinance pilots for a select population of loans in their own portfolios.

"Based on additional discussions, several more lenders are in the process of developing the capacity to utilize the FHA Short Refinancing option by midyear and intend to collectively assist several thousand more homeowners," Stevens said.

He testified Wednesday before a House Financial Services panel that is slated to vote on terminating the FHA short refi and HAMP programs on Thursday.

Now that home values have nearly stabilized, "lenders can make more accurate calculations about the expected returns from principal reductions," Stevens testified. He said lenders have "increasingly recognized that a principal write down can be an economically rational alternative to foreclosure to preserve value in their mortgage holdings."

Once investors agree to a writedown of at least 10% on the loan balance, the FHA short refi program allows the servicer to refinance the conventional loan into a new FHA-insured mortgage with a 97.75% loan-to-value ratio.

Borrowers must be current on their payments and the second mortgage must be written down so the combined LTV does not exceed 115%.

The average credit score on the 44 FHA short refis approved thus far is 711. The average write-off is $60,000, and the average balance on the new government guaranteed mortgage is $248,400 with a 91.4% LTV ratio

I can be reached for comment at 866-901-3576 or PatrickM@Northpointe.com . Patrick McCarthy, Northpointe Bank Mortgage