PrintIn response to tumbling home values across the nation, the Obama administration is expanding its Home Affordable program to permit more borrowers who hold underwater mortgages to participate in the program.
Homeowners whose mortgage loan balances are 25 percent above the value of their homes are now eligible to refinance their homes under the Home Affordable program. Previously, the eligibility limit was 5 percent above the value of their homess (i.e., a loan-to-value ratio of 105 percent).
To date, about 20,000 loans have been refinanced under the program, according to the Treasury Department. This new program modification is expected to increase the number of refinancing transactions considerably.
It is important to note that these refinancing transactions are permitted only on Freddie Mac and Fannie Mae owned or backed loans. Since these agencies are essentially government agencies, it is not a stretch to say that the federal government now has a great deal of equity (i.e., tax dollars) at stake in homeownership. Even with a refinanced mortgage loan (which reduces monthly mortgage payments), homeowners whose loan balance is 25 percent greater than the value of their home, may still have the incentive to walk away (default) from their mortgage loan if their financial situation worsens. In this case, the federal government would end up holding an underwater mortgage.
To put this into a broader perspective, the private credit markets are requiring an 80 percent loan-to-value ratio (i.e., a 20 percent downpayment) for home financing, while in this program, the government is permitting a 125 percent loan-to-value ratio; a 45 percent difference.
Only time will tell whether excessively loose government underwriting will limit the number of future foreclosures, while limiting taxpayer costs. But make no mistake, the Home Affordable program has now become a robust homeowner bailout program. The government is stepping out on a limb on this one.
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