With interest rates at record lows, any homeowner with good enough credit and enough equity to can lower his or her mortgage payment by refinancing the loan.
But that option isn’t available to millions of “underwater” homeowners — people who bought their homes at or near the top of the home-price bubble, only to see their homes’ value drop below the amount they owe after home prices collapsed.
Now, the Obama Administration has unveiled a plan that will let some homeowners refinance their mortgages — and take advantage of lower interest rates — even when they owe more than their home is worth.
Among the provisions will be a measure increasing loan amounts made above the value of the home. The program is being offered under the federal government’s two-year-old Home Affordable Refinance Plan, the Federal Housing Finance Agency announced today.
Currently, the ceiling for refinancing a loan is 125% of a home’s value — for example, a $125,000 mortgage on a home worth $100,000. That ceiling would be removed for fixed-rate mortgages backed by Fannie Mae and Freddie Mac, the FHFA statement said.
Typically, you can only refinance your loan and take advantage of lower interest rates if your home is worth more than the amount you owe. After all, lenders need to have enough collateral in the home to pay off the mortgage if you stop making payments.
This has been a bind for many underwater borrowers who managed to make payments until now, but have been unable to take advantage lower rates. And being able to refinance may help many avoid foreclosure — and reduce housing’s drag on the overall economy.
According to news reports, the new plan likely will help 600,000 to 1 million borrowers refinance their mortgages. MSNBC reported, however, that is only a fraction of the estimated 11 million homeowners who are underwater.
FHFA said that details about the program should be released by Nov. 15.
But highlights include:
- Eliminating fees for borrowers who refinance into shorter-term loans (for example, converting a 30-year loan into a 15-year).
- Eliminating the need for a new property appraisal where there is a reliable computer-generated value estimate.
- Waiving warranties that lenders make on loans sold to or guaranteed by Fannie Mae and Freddie Mac — so Fannie and Freddie won’t force them to buy back loans that go bad.
- Removing the current ceiling that limits eligibility to those who owe a maximum of 25% more than their home is worth.
Two local mortgage brokers hailed the proposal as a way to help both homeowners and the overall economy.
Paul Scheper, regional manager of Greenlight Financial in Irvine, said the plan will provide a “snorkel” for underwater homeowners with good incomes and credit scores.
“Such a measure would boost the hopes of the homeowner while reducing the credit risk via lower payments of the bank,” Scheper said. “It also helps the economy because this frees up additional funds to inject back into the economy. It’s a classic Win-Win-Win.”
The best news is no appraisal and nominal underwriting rules, added Laguna Niguel mortgage broker Jeff Lazerson.
“There is a great chance each participating borrower is going to save hundreds of dollars per month on his or her house payments,” he said.
Lazerson said the program will encourage more lenders to participate because FHFA essentially promised lenders that Fannie and Freddie won’t have recourse if these loans go bad. That, he said, will increase price competition among lenders.
Lazerson believes the program will be “the single greatest program” to stabilize the housing market.
“Fewer homeowners will be mailing their keys back to their lenders,” Lazerson said. “Next thing you know, we’ll actually be spotting buyers at weekend open houses again.”
Here’s more on the proposed refinancing plan …
- FHFA, Fannie Mae and Freddie Mac Announce HARP Changes
to Reach More Borrowers — FHFA release
- US announces help for underwater homeowners — MSNBC
- Twelve Questions on Obama’s Refi Plan — Wall Street Journal
- Jobs Plan Stalled, Obama to Try New Economic Drive — New York Times
This article is from the Orange County Register: Obama casts lifeline to underwater homeowners