Obama Expands Mortgage Refi Program
The Obama administration is expanding its mortgage refinancing program to allow more borrowers to take part.
Borrowers whose loans are now worth up to 125% of their home’s value are now eligible to refinance their homes under the Obama foreclosure prevention plan announced in February. Previously, the limit was 105%. The new limit is 125% !!
The move confims that home prices in many areas fell so far that many people were unable to participate in the program.
For example, at least 67% of homeowners in Las Vegas owe more than their homes are worth.
More than one in five borrowers are now underwater. Homes in parts of California and Florida losing more than 50% of their value. Almost 20 million people own homes worth less than their mortgages.
This program waives the requirement that homeowners have at least 20% equity in their home, allowing them to take advantage of recent lower rates. Homeowners must still meet other criteria, including being current on their payments and having loans that are owned or backed by Fannie Mae or Freddie Mac. The administration has set up a Web site, www.makinghomeaffordable.gov, with more information.
This expansion means those with homes worth $200,000 and mortgages as large as $250,000 can still qualify. Previously, these borrowers could not have loans exceeding $210,000. This is BIG news for homeowners.
The program, however, has been slow to ramp up. Borrowers have complained that banks are not approving their applications. Many banks instituted their own limitations on the guidelines which essentially limited most borrowers from participating.
The administration has projected that 4 million to 5 million mortgage borrowers would be helped if they decided to participate.
The recent increase in mortgage rates has held back the plan’s benefit. The Federal Reserve has been buying mortgage backed securities and long term Treasury bonds in an effort to lower rates.
It worked for a while. Rates hit a low of 4.84% on April 28, but are now at 5.45%.
Since mortgage rates have been in the 6% range in recent years, refinancing to the mid-5% range may not be worth it. A homeowner with a $200,000 mortgage at 6% would see a savings of about $64 a month if he refinanced at 5.5%, and that’s before closing costs.
The administration’s announcement comes on the same day as an industry group reported that the demand for refinancing dropped 30% last week. In addition to higher rates, rising unemployment is contributing to the decline.
Borrowers with Freddie Mac loans who refinance through their current servicer can apply right away, but those who want to go through a different lender must wait until Oct. 1. Those with Fannie Mae mortgages must use their current lenders and wait until Sept. 1.
A second part of the program lets eligible borrowers who are in default (or at risk) lower their monthly payments to no more than 31% of their pre-tax income. This can help those who are not making as much at their jobs or who have monthly payments they can’t handle. Homeowners, servicers and mortgage investors can receive incentives to entice them to participate in the program. Whether the banks will willingly participate in this portion of the program is yet to be determined.
Banks have extended more than 200,000 trial modification offers, according to the Treasury Department. Homeowners must make three monthly payments on time before the modification is made permanent.