In a move that suggests its initial rescue plan was insufficient, the Obama administration yesterday announced plans to widen the eligibility parameters of a key housing initiative. The change would allow borrowers with mortgages valued at 125 percent of their home's worth to refinance into more affordable loans. Previously, only borrowers with so-called loan-to-value ratios of 105 percent or less could do so. The mortgage refinancing program is part of the president's two-pronged plan to pull the nation out of its worst housing slump since the Great Depression. Coupled with efforts to modify troubled mortgages, the government believes its Making Home Affordable initiative can reach up to 9 million American homeowners. "The president's Making Home Affordable plan is already helping far more families than any previous foreclosure initiative, and with today's announcement we will extend its reach still further," Housing and Urban Development Secretary Shaun Donovan said.
Here are six things you need to know about the expanded rescue:
1. Fannie/Freddie only: Despite the higher loan-to-value ceiling, the original framework of the program remains in tact. For example, only borrowers with loans owned or guaranteed by government-controlled housing finance giants Fannie Mae or Freddie Mac can participate. At the same time, borrowers need to be current on their mortgage to qualify.
2. Falling prices, less equity: The expansion of the qualification parameters comes as the real estate market continues to erode. Home prices in 20 major metropolitan areas fell by more than 18 percent in April from a year earlier, according the Case-Shiller home price index. Among other things, sliding home prices suck equity out of homes. Because of plunging values, more than a fifth of American homeowners were considered "underwater"—meaning they owe more on their mortgages than the property is worth—in the first quarter of this year, according to Zillow. This evaporation of home equity threw sand in the gears of the administration's refinancing initiative. That's because the original terms of the program precluded borrowers with mortgages exceeding 105 percent of their home's value from participating. But by expanding the loan-to-value cap to 125 percent, even borrowers who are significantly underwater will be eligible to refinance through Uncle Sam.
3. Efforts so far: When it rolled out the initiative earlier this year, the Obama administration said the refinancing program could reach up to 5 million homeowners. But in its release yesterday, HUD acknowledged that only "tens of thousands" of refinancings have occurred so far.
4. Expanded reach: The new standards could make up to 2 million additional borrowers eligible to refinance through the program, according to the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac. "This program could assist many homeowners who otherwise would have difficulty refinancing due to declining house prices," FHFA Director James Lockhart said yesterday.
5. Mortgage rate hurdle: But not all of those 2 million additional borrowers will end up refinancing. Some won't meet other program requirements, such as being current on their loan. But it's the recent upward trend in mortgage rates that represents perhaps the biggest threat to the program's success. Refinancing applications surged last fall and winter, after the federal government engineered mortgage rates of below 5 percent. But as bond traders became rattled by sharp increases in government spending, they sent yields on 10-year treasury notes—which fixed mortgage rates typically tack—skyward in recent months. As a result, mortgage rates surged, hitting 5.81 percent on June 11, according to HSH.com.
Since borrowers generally need a full percentage-point difference between their current rate and market rates to benefit from refinancing, higher rates have hammered the housing market. What's more, even as mortgage rates have drifted lower in recent weeks, refinancing applications have remained depressed. "While 30-year rates in the mid-5s are low on a long-term historical basis, they're not very low relative to the last five or six years," Mike Larson of Weiss Research said in a report. "The average since mid-2003 (when we had the last mega-boom in [refinancings]) is 6 percent, according to Freddie Mac. So the universe of mortgages that can be refinanced on a "rate and term" basis isn't very large in the mid-5s. ...We're going to need to see rates head back into the 4s to get the mortgage train rolling again."
6. Second housing tweak: The expansion of the Making Home Affordable program follows the Obama administration's recent change to its first-time home buyer tax credit. In mid-February, the president enacted this tax incentive—which offers up to $8,000 to qualified first-time home buyers—to stimulate housing demand and help mop up excess supply. In late May, HUD unveiled a program that would provide buyers more immediate access to these funds, which they could put toward closing costs as well as a portion of their down payment.