Refinancing lifeline fails to reach most 'underwater' homeowners

By Renae Merle
Saturday, October 24, 2009

A seven-month-old government program to help homeowners with little or no equity refinance their mortgages has so far reached fewer than 3 percent of those targeted, with many struggling borrowers deciding that the benefits of a new loan aren't worth the closing costs.

This lackluster performance reflects the difficulty of helping the growing segment of "underwater" homeowners -- those who owe more than their home is worth.

The program is a key component of the Obama administration's efforts to stabilize the housing market and arrest the nation's growing foreclosure rate. But the initiative has received far less public attention than its companion, a loan modification program that pays lenders to lower the payments of delinquent borrowers who are in imminent danger of losing their homes.

The refinancing program targets borrowers who are not in trouble on their mortgage now but, because they are underwater, are at risk of falling into trouble later. By suspending the traditional refinancing requirement that borrowers have equity, officials hope to make them less vulnerable to foreclosure. Homeowners whose loans are backed by mortgage financiers Fannie Mae or Freddie Mac are eligible.

This effort has so far helped about 130,000 of the up to 5 million borrowers the Obama administration has said are potentially eligible, according to government data.

"We would have liked to move at a faster pace, but it does take time to ramp up," said Seth Wheeler, counselor to the secretary at the Treasury Department. But "it has been a substantial help to those that have been able to refinance."

Ironically, the program is struggling during one of the nation's largest refinancing booms. Mortgage rates have hovered at 5 percent or below for 30-year fixed rates in recent weeks, according to a weekly survey from Freddie Mac. The value of refinanced loans is on track to jump 60 percent this year, according to the Mortgage Bankers Association.

During a recent conference call with reporters, Treasury Secretary Timothy F. Geithner noted that, with mortgage rates near historic lows, 3 million homeowners had already refinanced this year. That refinancing boom pumped $10 billion in purchasing power into the economy, chimed in Shaun Donovan, secretary of the Department of Housing and Urban Development.

But those benefits have yet to trickle down.

"The government is spending a trillion dollars to drive mortgage rates down, and it's been successful. But who is taking advantage of that? The people with the best credit and best equity. Not the people on the fringes," said Bob Walters, chief economist of online mortgage company Quicken Loans.

Scarce equity

Recent studies have shown that one-third of borrowers are underwater on their mortgage. In the Washington region, about 34 percent of borrowers owed more money than their homes were worth during the first quarter of the year, according to First American CoreLogic. The problem is most acute for borrowers who took out loans in 2006 and 2007 -- about 60 percent of them are underwater, according to Fitch Ratings.

Yet for many underwater borrowers, refinancing isn't always attractive because they could still owe more than the value of their home and face years of payments before they regain equity. Refinancing can be especially risky for those homeowners who might move within a few years or who are nervous about losing a job.

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