June 29th, 2009

Is Refinancing More Underwater Loans Really the Answer?



Last week we reported how Fannie Mae and Freddie Mac’s boss, the Federal Housing Finance Authority (FHFA), was considering whether or not to expand the Home Affordable Refinance Program (HARP) by refinancing loans with an LTV of over 105%. The program’s apparent lack of success has regulators scrambling to find ways to help more homeowners:

“We’re actively considering how to structure a program that makes sense over 105 percent,” Federal Housing Finance Agency Director James Lockhart said yesterday. He said a ratio of 125 percent “is a number” that’s on the table, though “not necessarily the number we’re going to end up with.”

As home prices continue to decline, homeowners across the nation sit helplessly as they watch their home’s equity disappear. Up until now, only homeowners who are less than five percent underwater have been able to refinance their loan under the HARP. The Fed has recently suggested that homeowners who are more than five percent underwater are an under-served audience. Furthermore, reaching out to this under-served audience would also help President Obama inch his way toward his promised goal of helping 4-5 million homeowners refinance:

But now it appears that housing prices have fallen so far that the Obama administration won’t get anywhere near that figure unless the government lowers the bar to allow mortgages with 25% negative equity to refi. The Feds hinted as much in a mid-May Treasury release: “Fannie Mae has had over 233,000 eligible refinance applications through its refinancing program, with more than 51,000 of these having loan-to-value ratios between 80% and 105%.” And the other 182,000 applications?  I’ll take the fact that the  Feds are floating the notion of changing the program to throw lifesavers out to folks 25% underwater  as a sign that the current cutoff of 5% underwater isn’t doing the trick.

Yet, Carla Fried of CNNMoney.com thinks, and we tend to agree, that expanding the program’s criteria may not be the solution to the problem. If home prices decline even further, homeowners will be even less motivated to continue making payments on a home that is losing significant value. Moreover, if the homeowners are already behind on their mortgage payments, the only favor regulators may be doing for them is delaying the inevitable foreclosure.

Fried concludes that, “Perhaps it would be faster and less expensive to let the housing bubble naturally deflate, rather than try to keep propping it up.”

Do you agree?

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4 Responses to “Is Refinancing More Underwater Loans Really the Answer?”

  1. Bill Rice Says: June 30th, 2009 at 8:33 am

    What a challenging question.

    I was, and still am, an advocate of natural bubble bursting. However, I think the challenge is once the the government kicks into action it is hard to unwind federal intervention. Do you continue forward to meet the original objective or do you declare failure and turn it back over to free markets.

    I think I am still in the camp that legislation–”affordable housing”–got us into this and the only path out is to let the bubble burst and try to keep politicians hands off the economic rudder.

    Unfortunately, I fear this is nearly impossible. Those troubled homeowners are political constituents and voters. We will see this and more programs that will continue to open lending wider–IMHO.

  2. Tim Manni Says: June 30th, 2009 at 9:15 am


    Great points. I think most of us who are at least somewhat familiar with how the housing market operates are looking forward to the unwinding of Federal intervention. But as you alluded to, if it isn’t done right, it could mess up the markets even more. It’s going to have to be a careful and slow process.

    “the only path out is to let the bubble burst and try to keep politicians hands off the economic rudder.” — I’m pretty sure you commented on our story, “Do They Never Learn,” which introduces, once again, the push by certain politicians to rally for affordable housing, even when it’s against the best interest of the lending institutions.

    It is a really challenging question indeed, and again, as you said, these homeowners that need help are voters and lawmakers’ entire purpose centers around reelection. So what are we to do? My guess is until the housing market shows serious signs of recovery, these initiatives will only be expanded.

    Thanks as always Bill,

  3. Taylor McKenzie Says: June 30th, 2009 at 7:08 pm

    You can get a free Homeowner’s Handbook on President Obama’s “Making Home Affordable” plan at http://MortgageCreditTrauma.com.

    This plan outlines the rules and eligibility guidelines for 1st & 2nd loan modifications as well as giving a Loan Comparison Chart for Countrywide/BofA, CitiGroup/CitiMortgage, IndyMac Fed Bank and JP Morgan who is also accepting Washington Mutual and EMC Mortgage Corp customers.

    Hope this helps!

  4. Tim Manni Says: July 1st, 2009 at 11:40 am


    Thanks for the resources, we’ll check them out.


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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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