The Mortgage Professor

The Mortgage Professor: Guide to Government's Mortgage Refinancing Program

By Jack Guttentag
Saturday, April 25, 2009

The government's mortgage assistance program, called Making Home Affordable, has two parts, one for mortgage refinancing, the other for mortgage modification. Here's a look at the refinancing portion, which applies only to mortgages owned or guaranteed by Fannie Mae or Freddie Mac.

-- Purpose: The objective of the refinance program is to allow borrowers to refinance who otherwise find it impossible or too costly because of declines in the value of their properties.

Under the program, loan balances can range up to 105 percent of current property value, but in all other respects, borrowers must meet conventional underwriting requirements: their existing payments must be current; they cannot have more than one 30-day-late payment in the previous 12 months; and their income must be sufficient to cover the new payments.

-- Pricing: Interest rates under the program are "market rates," but what that means exactly is hard to say. It is not clear, for example, whether the agencies will charge more for a 90 percent loan that does not have mortgage insurance than for one that does. Whatever it means, we can be sure that prices will fluctuate from day to day, and that the prices loan originators quote to borrowers will include varying markups and fees on top of the prices at which they sell to the agencies. Markups are likely to be particularly high on loans held by Freddie Mac, which will accept only those loans refinanced by the lender now servicing them.

-- Mortgage insurance: An unusual feature of the program is that any mortgage insurance on the existing loan will be carried forward to the new loan. (Ordinarily, mortgage insurance is terminated when a loan is paid off and, if required, a new policy is issued on the new mortgage). The mortgage insurers have to agree to this arrangement, but since it is clearly in their interest, that should not be a problem.

This is a sensible idea, because it prevents a sudden drop in insurance premiums to the beleaguered mortgage insurers, and it also provides a way to comply with the rule that any loan acquired by Fannie or Freddie that exceeds 80 percent of property value carry mortgage insurance or its equivalent.

-- Rationale for the 105 percent loan cap: Capping the loan balance at 105 percent of value presumably is based on a judgment that borrowers with adequate income and a good payment record are not going to default just because they owe 5 percent more than their house is worth. That makes sense. What doesn't make sense is that borrowers with more than 5 percent negative equity are not eligible for the refinance program, and can't get their problem fixed by a loan modification under the second part of the administration program, either.

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