Two big questions loom over the Obama administration’s latest bid to help troubled homeowners: Will it work? And who would benefit?
By easing eligibility rules, the administration hopes 1 million more homeowners will qualify for its refinancing program and lower their mortgage payments — twice the number who have already. The program has helped only a fraction of the number the administration had envisioned.
In part, that’s because many homeowners who would like to refinance can’t because they owe more on their mortgage than their home is worth. But it’s also because banks are under no obligation to refinance a mortgage they hold — a limitation that won’t change under the new plan.
Here are some of the major questions and answers about the administration’s initiative:
What is the program?
The Home Affordable Refinance Program, or HARP, was started in 2009. It lets homeowners refinance their mortgages at lower rates. Borrowers can bypass the usual requirement of having at least 20 percent equity in their home. But few people have signed up. Many "underwater" borrowers — those who owe more than their homes are worth — couldn’t qualify under the program. Roughly 22.5 percent of U.S. homeowners, about 11 million, are underwater, according to CoreLogic, a real estate data firm. As of Aug. 31, fewer than 900,000 homeowners, and just 72,000 underwater homeowners, have refinanced through the administration’s program. The administration had estimated that the program would help 4 million to 5 million homeowners.
Why did so few benefit?
Mainly because those who’d lost the most in their homes weren’t eligible. Participation was limited to those whose home values were no more than 25 percent below what they owed their lender. That excluded roughly 10 percent of borrowers, CoreLogic says. In some hard-hit areas, borrowers have lost nearly 50 percent of their home’s value. Another problem: Homeowners must pay thousands in closing costs and appraisal fees to refinance. Typically, that adds up to 1 percent of the loan’s value — $2,000 in fees on a $200,000 loan. Sinking home prices also left many fearful that prices had yet to bottom. They didn’t want to throw good money after a depreciating asset. Or their credit scores were too low. Housing Secretary Shaun Donovan acknowledged that the program has "not reached the scale we had hoped."
What changes is the administration making?
Homeowners’ eligibility won’t be affected by how far their home’s value has fallen. And some fees for closing, title insurance and lien processing will be eliminated. So refinancing will be cheaper. The number of homeowners who need an appraisal will be reduced, saving more money. Some fees for those who refinance into a shorter-term mortgage will also be waived. Banks won’t have to buy back the mortgages from Fannie or Freddie, as they previously had to when dealing with some risky loans. That change will free many lenders to offer refinance loans. The program will also be extended 18 months, through 2013.
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Those whose loans are owned or backed by Fannie Mae or Freddie Mac, which the government took control of two years ago. Fannie and Freddie own or guarantee about half of all U.S. mortgages — nearly 31 million loans. They buy loans from lenders, package them into bonds with a guarantee against default and sell them to investors. To qualify for refinancing, a loan must have been sold to Fannie and Freddie before June 2009. Homeowners can determine whether their mortgage is owned by Fannie or Freddie by going online: Freddie’s loan tool is at freddiemac.com/mymortgage; Fannie’s is atfanniemae.com/loanlookup. Mortgages that were refinanced over the past 2½ years aren’t eligible. Homeowners must also be current on their mortgage. One late payment within six months, or more than one in the past year, would mean disqualification. Perhaps the biggest limitation on the program: It’s voluntary for lenders. A bank remains free to reject a refinancing even if a homeowner meets all requirements.
Will it work?
For those who can qualify, the savings could be significant. If, for example, a homeowner with a $200,000 mortgage at 6 percent can refinance down to 4.5 percent, the savings would be $3,000 a year. But the benefit to the economy will likely be limited. Even homeowners who are eligible and who choose to refinance through the government program could opt to sock away their savings or pay down debt rather than spend it.
How many homeowners will be eligible or will choose to participate?
Not entirely clear. The government estimates that up to 1 million more people could qualify. Moody’s Analytics says the figure could be as high as 1.6 million. Both figures are a fraction of the 11 million or more homeowners who are underwater, according to CoreLogic, a real estate data research firm.
Who will benefit most?
Underwater homeowners in the hard-hit states of Arizona, California, Florida and Nevada could be greatly helped. Many are stuck with high mortgage rates after they were approved for mortgages with little or no money as a down payment and few requirements. The average annual savings for a U.S. household would be $2,500, officials say.
When will it start?
Fannie and Freddie will issue the full details of the plan lenders and servicers on Nov. 15, officials say. The revamped program could be in place for some lenders as early as Dec. 1.