For the last few years borrowers who had enough equity in their home to refinance their first mortgage but who were underwater when they combined their first and second mortgage had the option of refinancing the first mortgage only into an FHA loan as long as the second mortgage agreed to stay in second lien position. These so-called “subordination deals” were fairly complicated and never became very popular but they were at least an option. But recently the FHA announced it will no longer allow such subordination deals.
We get this from the recent FHA mortgagee letter on the topic:
This Mortgagee Letter eliminates the unlimited Combined Loan-to-Value (CLTV) ratio that was first introduced in Mortgagee Letter 2007-11.
The old policy is being replaced with the questionable new FHA short refinance program.
UPDATE (2012): On most FHA streamlines (FHA to FHA refinances) the FHA does allow subordinations now as long as the combined loan to value (CLTV) is lower than the value the FHA placed on the home at the time the current FHA loan was completed. COntact us in the sidebar to learn more.