The Federal Housing Administration has landed two big lenders to adopt its principal-reduction program, which helps underwater homeowners refinance into FHA-insured loans.

Treasury Secretary Tim Geithner and Housing and Urban Development Secretary Shaun Donovan have been pressing chief executives of some of the largest mortgage banking companies to implement the FHA's "short" refinancing program.

FHA chief David Stevens last week told a congressional panel that a "couple of the large ones are actually building up the capacity to roll out the program." (He did not identify the lenders.)

The biggest funders of FHA loans include: Wells Fargo & Co., Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc.

Stevens noted that 27% of homeowners with a mortgage are underwater and that more lenders are needed to participate in the program for it to have a real impact.

FHA designed the program to refinance conventional mortgages. Borrowers must be current on their loan to qualify for a refinancing.

The short refi program requires servicers to write down the principal amount by at least 10%, allowing the loan to be refinanced into a standard, fully underwritten FHA mortgage with a 97.75% loan-to-value ratio. This refinancing will "right-size" the mortgage, creating equity for the borrower.

The short refi also reduces the borrower's mortgage payments and gives him or her the opportunity to sell the house, if feasible, without wrecking their credit.

"We believe that principal writedown is absolutely needed," Stevens said.

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