White House to Expand Mortgage Refinancing Program
Thursday, July 2, 2009
The Obama administration announced yesterday that it would loosen the eligibility requirements for a program aimed at helping borrowers with no equity in their homes to refinance into cheaper mortgages.
Acknowledging that falling housing prices have made it increasingly difficult for borrowers to qualify, officials said the program would now be open to those whose mortgage debt is up to 125 percent of their home value. The program, launched in February, was initially open only to those borrowers who owed no more than 105 percent of their home value.
The program targets the growing number of borrowers -- one in five according to recent research -- who owe more than their home is worth, a situation known as "being underwater." These homeowners are considered at a higher risk of foreclosure and have been targeted by the Obama administration under its Making Home Affordable program.
Borrowers have traditionally been prevented from refinancing if they had less than 20 percent equity in their home. Under the initial program, that requirement was significantly modified so that for a home worth $200,000, for example, the borrower's mortgage could not exceed $210,000. Now, the mortgage on that house could be as much as $250,000 and still qualify for refinancing.
"By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly. It's a crucial step in our broader efforts to get America's housing market and economy on the path to recovery," Treasury Secretary Timothy F. Geithner said in a statement.
The administration initially estimated in February, when the program was first announced, that 4 million to 5 million borrowers would be eligible. More recently, administration officials have said that "tens of thousands" of homeowners have been helped so far. An additional 2 million borrowers could be eligible after the program is revamped, though not all would qualify for or even benefit from refinancing, according to the Federal Housing Finance Agency. The expanded program is expected to have the greatest impact in regions where home prices have fallen the most from their peak, including California, Nevada and Florida, which have the highest rates of foreclosure.
"To the extent you are able to lower their mortgage payments and their debt burden, homeowners are less likely to default," said Steve O'Connor, senior vice president of government affairs at the Mortgage Bankers Association, an industry lobby group that pushed for the change. "It's a net positive for efforts to stabilize the markets."
The refinancing program is central to President Obama's broader housing plan, which also includes measures to help distressed borrowers stay in their homes by paying lenders to modify their loans. The refinancing effort focuses on borrowers who have not missed any mortgage payments, but are unable to take advantage of historically low mortgage rates because their home values have fallen.
The program is still limited to borrowers with loans backed by Fannie Mae and Freddie Mac, the government-controlled mortgage finance companies. The effort has been hampered by a recent uptick in mortgage rates. After falling to a historic low of 4.61 percent for a 30-year fixed-rate mortgage in March, mortgage rates have risen steadily, according to a weekly survey by the Mortgage Bankers Association. The average rate was 5.34 percent last week, according to the survey, which found that refinancing applications fell by 30 percent.
Administration officials initially played down calls to expand the refinancing program, saying that there was not a clear market for Fannie Mae and Freddie Mac to sell underwater mortgages in the secondary market. James Lockhart, director of FHFA, which regulates the companies, said in a statement yesterday that officials "thought it more appropriate to begin at 105 percent, because the refinanced loans would be eligible" to be packaged with Fannie and Freddie's "most liquid" mortgage-backed securities. "We wanted to start there before expanding to higher" loan-to-value ratios.