Lack of Equity Slows Federal Aid Program
Wednesday, September 30, 2009
A federal program to allow borrowers with little or no equity in their homes to refinance is struggling to gain traction, according to government data released Tuesday, showing that only 93,070 borrowers have been helped since the effort was launched in April.
The program has encountered difficulties that government regulators had not expected, such as the limited capacity of lenders to carry it out and the large proportion of borrowers who could not initially qualify because their home values had fallen so sharply.
The refinancing program is part of the Obama administration's massive housing program, known as Making Home Affordable. The administration has said up to 7 million borrowers could benefit from the effort. But it has received less attention than its sister program, a $75 billion loan modification effort aimed at saving borrowers from foreclosure.
The lesser known initiative is aimed at borrowers who could not qualify for traditional refinancing because they had less than 20 percent equity in their home, a problem that has been exacerbated by plummeting housing prices throughout most of the country. Recent data has shown that about one-third of borrowers owe more than their homes are worth, putting them at a higher risk of foreclosure.
The program's progress was hampered earlier this year by an uptick in mortgage rates. Also, lenders initially didn't have enough staff or proper procedures in place to carry out the program and had to ramp up, housing analysts have said.
"Operational challenges and capacity constraints on an industry-wide scale have limited [the program's] loan traction to date but expectations are for increased volume in the months ahead," according to a statement from the Federal Housing Finance Agency.
The program originally was limited to borrowers with a mortgage that did not exceed 105 percent of the current value of their property. For example, if the value of a property is $200,000 but the owner owes $210,000, he or she could qualify. In July, the government announced it would expand the program to borrowers' whose mortgage do not exceed 125 percent of the current value. So the mortgage on that house could be as much as $250,000 and still qualify for refinancing.
But Fannie Mae did not implement the higher limit until September and Freddie Mac is not scheduled to allow those types of refinancing deals until October.
Even when the higher limit is fully in effect, it will not be enough for many borrowers, said Guy Cecala, publisher of Inside Mortgage Finance. Homeowners who bought at the peak of the market, many with little money down, have seen their home values drop 30 percent or more, he said. Cecala urged that borrowers should be able to qualify for the program no matter how far underwater they are.