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
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.
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