More Help for Homeowners Underwater in Their Mortgages

I previously wrote that some democrats in Congress were pressing the Federal Housing Finance Agency (FHFA) for an expansion of the government’s refinancing program. In particular, they wanted to see more support for homeowners who are underwater in their mortgages.

It seems their efforts have worked to some degree. The Dow Jones Newswire released information this morning that precedes an announcement by Barack Obama, scheduled for this afternoon. According to the release, the FHFA will extend its refinancing program for more homeowners who are underwater in their mortgages.

Definition: Underwater homeowners are those who owe more on their mortgage loans than their homes are currently worth. If I owe $265,000 on my mortgage, but my home is worth closer to $200,000 in the current market (due to depreciation), then I am underwater in my mortgage. In this scenario, my mortgage balance is roughly 125% of my home’s value. Keep that percentage in mind — it will come up again later.

What Underwater Homeowners Need to Know

The details of the program are still emerging. I expect to know more over the next few days, and will update this page as needed. If you’re currently underwater in your mortgage loan, here’s what you need to know about the changes:

  • This program is actually an expansion of an existing program, the Home Affordable Refinance Program (HARP). The HARP refinancing program was first launched in the wake of the housing crisis that started in 2008.
  • Under the original HARP initiative, homeowners who were underwater in their mortgages up to a certain amount could refinance their home loans. But there was a cap set at 125% loan-to-value or LTV. If a homeowner’s mortgage balance was more than 125% of their home value, he or she would not qualify for the program.
  • One of the key changes announced today is that the program will now be available to homeowners who are underwater in their mortgages beyond the 125% LTV mark. In other words, you could still qualify for the program if your mortgage balance is greater than 125% of your home’s value.
  • This change will open the refinancing program to a much larger pool of homeowners. It will allow certain people to refinance no matter how much their homes have depreciated. Even people who are deeply underwater in their mortgages could qualify for a refinance loan under the revised HARP guidelines. These changes effectively remove the 125% LTV cap mentioned above.
  • In order to qualify, homeowners must have a mortgage loan that is owned or guaranteed by Freddie Mac or Fannie Mae. You can find this out by using the “loan look-up” tools on their respective websites. Here is Freddie Mac’s loan look-up tool.
  • It will take some time for this change to be implemented in a significant way. Currently, it is difficult (and often impossible) to sell refinanced underwater loans into the secondary mortgage market. It will take time for officials to figure out how to package them into mortgage-backed securities (MBS). This may not happen until 2012.
  • The HARP expansion could also make it easier for some homeowners to refinance, including those who are underwater in their mortgages. It would do this by removing home-appraisal requirements in certain cases, and by relaxing the underwriting guidelines for qualified homeowners. Homeowners must be current on their mortgage payments to enjoy these benefits.
  • The revised version of HARP is expected to run through 2013.

The government’s refinancing program is being overseen by the FHFA, which also oversees Fannie Mae and Freddie Mac. FHFA officials anticipate that this revision could double the enrollment in HARP. It could affect more than a million homeowners who are underwater in their mortgages, in 2012 alone.

Other changes to the HARP program were mentioned as well:

The FHFA is encouraging the use of shorter-term mortgages, like a 15-year fixed mortgage as opposed to a 30-year loan. It does this by removing some of the “risk-based fees” that have been levied on short-term refinancers in the past.

The FHFA is eliminating the requirement for a new home appraisal (prior to refinancing) in certain cases. If Freddie Mac and/or Fannie Mae can determine the value of a property through an automated valuation model, or AVM, a new appraisal may not be necessary. This expedites the process for the bank and the homeowner alike.

As mentioned earlier, program is now being extended through the end of 2012.