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Obama Extends Mortgage Refinancing Program To Help More Homeowners, Raising New Limit To 125%
July 1st, 2009
The Obama administration has
stretched its mortgage refinancing
program to allow more homeowners and borrowers hit hard by plummeting home
values to participate.
Homeowners who have loans
worth up to 125% of their home’s value are now eligible for the government
refinancing program officially announced by the administration early February
2009. The previous initial limit was 105% and the new 125% expansion was recently
announced by Housing Secretary Shaun Donovan early July 2009. The program is set to expire on June 10th 2011.
The government is aware that
many people were shut out of the program when it was first announced.
Donovan states that President
Obama’s Making
Home Affordable Plan has made more progress than any other foreclosure
initiative. The new announcement should extend its reach even more.
Since mortgage rates are on
the rise, officials do not have an estimate and unsure of how many people will
be drawn to this program. According to the Treasury Department, some 20,000
loans have been refinanced so far.
The refinancing program
requires homeowners to have at least 20% equity in their homes to take
advantage of today’s lower rates.
In addition, borrowers must meet various requirements such as being
current on their payments including having loans that are owned and backed by Fannie Mae and Freddie Mac. For more information about the program, please visit: http://www.makinghomeaffordable.gov
Case Scenario
As an example, the new
expansion limit of 125% means that a home that has current market value of
$200,000 but with a loan mortgage worth $250,000 can qualify. If you do the
math, by taking 250,000 divided by 200,000 and it will yield 125%.
With the old-previous 105%
limit, if the home was worth $210,000 with a similar $250,000 mortgage, it will
not qualify. Let’s do the math by taking 250,000 divided by 210,000. This
will yield 119%. This number is way above the old limit of 105% and thus
declined until today. With the new announcement of the extension limit, this
will help qualify more people.
Critics say that the program
has been slow to progress. Many borrowers are frustrated that the banks are not
approving their applications. The 2009 forecast of originations were slashed by
the Mortgage Bankers Association because of fewer numbers of refinancing
performed. According to the association, only 13,000 refinancing were done in 3
months since the plan launched.
The administration originally
forecasted that 4-5 million homeowners will benefit from the plan. A Treasury
official said that the figures were based on people who qualified and not
people who eventually participated.
With the new extension of
125%, the administration does not have a clear estimate of how many are now
eligible and those who will eventually participate. The recent rise in mortgage
rates has hindered the plan from progressing well. The Federal Reserve has been
purchasing mortgage-backed-securities including long-term Treasuries in an
effort to lower mortgage rates. This worked well when rates hit a low of 4.84%
in April 2009. It has now climbed back up to 5.45%.
According to Keith Gumbinger, Vice President of HSH Associates, mortgage rates
have been in the 6% range for recent years. To refinance at the mid 5% level
does not sound very attractive. For example, a homeowner with a $200,000
mortgage at 6% will only save $64 a month if he refinanced at 5.5%. This is not
even inclusive of closing-costs. “Are interest rates low enough to warrant
getting into the process?” he asked.
The administration’s
announcement coincided with the day when industry experts reported that demand
for refinancing dropped 30% in the prior week. Besides rising rates, the
deterioration of unemployment is contributing to the decline.
Borrowers whose loans are
with Freddie Mac can apply immediately for a refinance through their loan
servicing party while others who need to go through a different lender must
wait till Oct 1st. Borrowers with Fannie Mae mortgages must use
their current lenders and wait until Sept 1st.
On the loan modification
front, it seems to be performing better relative to the refinance program.
According to the Treasury Department, banks have extended more than 200,000
trial modification offers.
Comments
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