As of September 7, the FHA has a new program to help people who are underwater (owe the bank more than their home is worth). Check out the details here. Basically, the program allows you to refinance your primary residence under certain conditions: The lender must agree to forgive 10% of your unpaid principal, you must obtain the cooperation of all lien holders, the lender must agree to forgive at least 10% of the unpaid principal on the original note to bring the combined loan to value ratio to a maximum of 115%, the new FHA loan must not have a loan to value ratio of more than 97.75%, you must be current on your payments, you must have a credit score better than 500 and meet other normal FHA requirements.
The federal government has tried desperately to stabilize the housing market through tax credits (see my last blog post), by purchasing mortgage backed securities, and implementing loan modification programs. None of these things have done the trick, and I don't expect that this new program will turn things around either. However, for homeowners that are just squeaking by, and that meet the criteria above, this may be an excellent way to refinance and save some money each month.