Is Refinancing More Underwater Loans Really the Answer?by Tim Manni
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?