Government Expands Refinancing Program

The government’s first attempt at creating a refinancing program carried guidelines that were too strict for most borrowers: “Candidates must live in their homes. They can already be behind in their payments or they must prove that they stand at the threshold of default because of financial hardship. The balance of their first mortgage cannot exceed $729,750, and they must make their new payment for a three-month trial period in order to qualify.” The sticking point, however, was that the mortgage value could not exceed the appraised value of one’s home by more than 5%.

From the government’s standpoint, this stipulation was eminently reasonable, since the more underwater one’s mortgage is, the less he has invested in the home and hence the less likely he is to repay. From the standpoint of borrowers – especially those with every intention to repay their mortgages- this requirement made little sense, as it discriminated against them for something they ultimately had no control over.

The government, however, quickly realized how restrictive this clause was: “With home values continuing to drop and the number of delinquent mortgages and foreclosures continuing to rise, it became clear that the 105 percent loan-to-value refinance ratio wasn’t helping enough homeowners lower their monthly mortgage payments.” In its most recent iteration, therefore, this restriction was “corrected,” such that borrowers can now qualify for the refinancing program with a Loan-to-Value ratio of up to 125%. [This is pretty incredible when you consider that a conforming mortgage cannot exceed 80% LTV].

Still, this won’t qualify everyone, especially those in some of the hardest hit areas. According to one economist, “the refinancing program will help those who bought or refinanced their homes in 2003 and 2004 and some who got mortgages in 2004. But he said it still does no good for many who financed houses in 2006 and 2007, when he said prices had ‘gone through the roof.’ ”

Under the new guidelines, borrowers will also be encouraged to shorten the term of the mortgage: “There will be an incentive of 0.125 percentage points on interest rates for opting for a 25- or 20-year term rather than 30 years.” In this way, borrowers that are currently underwater can hopefully move above water more quickly. This will also compensate potential participants for the recent rise in rates, by enabling them to still save on overall interest paid.

Unfortunately for borrowers, the program remains voluntary for banks. While technically you don’t need to be behind (delinquent) on your mortgage to qualify, it seems unlikely that the bank will voluntarily give you a break. In the end, the bank will still decide on a case-by-case basis whether a refinancing or foreclosure is most profitable (or less costly).