Let's try something different. Many home loan initiatives crafted to assist homeowners in distress have been introduced over the past year or two with great fanfare and thus far none of them have done much good. Now the Obama administration will try its hand at it. Its version will be officially unveiled tomorrow, but some key details have already surfaced. One of them is the refinance proposal.
According to the plan borrowers who are current on their mortgage payments and whose paper is owned or guaranteed by Fannie Mae or Freddie Mac may be in a position to refinance to today's rates. Cashout refis are not permitted, though. And there will probably be other restrictive guidelines, as there always is, but so far so good.
The main beneficial ingredient that has trickled out so far is that the loan-to-value, or LTV, can exceed the typical 80% the agencies currently require. If the LTV tops the 80% rule, then mortgage insurance is needed and right now it is difficult to get one in many markets because of uncertainty over property values. Under this new proposal, the LTV can go all the way up to 105%. In other words, qualified homeowners who are 5% underwater, or upside down, can still get their mortgage refinanced.
The present projection is that up to 5 million borrowers with Fannie Mae or Freddie Mac loans should fall within the program guidelines and hopefully take advantage of it. Regardless, the program has true potential to help in stabilizing the wobbly housing sector that led the country into this recession.
One important segment of the market was left out of the initiative, however. It involves homes that fall outside the 105% rule. The ones that are severely upside down. People owning them are more likely to fall victim to a foreclosure, or before that, just walk away and send the keys to the bank, or as they say, do jingle mail. This is where most of the defaults come from. As it now stands, states like Arizona, California, Florida and Nevada, where prices have steadily deteriorated, will benefit less than several others from the pact.
Yet, any step forward is a good step. There are no quick fixes to anything this dramatic.