Here's how the program is expected to work: Lenders who participate in the program must agree to write down at least 10% of the principal balance of the original first mortgage. A new appraisal must be obtained to determine the current market value of the home. After the principal write down, the new loan to value can be no higher than 97.75% of the new appraised value.
If you have a second mortgage, the lien holder must agree to subordinate their second mortgage to the new first mortgage, and must agree to write off any principal amount that exceeds 115% of current loan-to-value (LTV).
The program is voluntary for the mortgage lenders. That means that not all lenders will participate in the program, and that means you might not be able to refinance your mortgage with FHA.
The program is expected to implemented sometime in the fall of 2010.
I believe the program you are asking about is called HAFA. It is designed to assist homeowners with staying in your home. The goal is to modify your current payment to a more affordable monthly payment. For some, this will not work and an alternate program allows you to list your home for sale with a pre-determined sale price which is in line with the market of your community. It is in fact a short sale. You might want to speak with a Realtor in your area, as well as your mortgage company to learn more details on your ability to participate. In the long run, you will do much better for having made those calls. Good luck to you.