The Washington Post with an update on the Making Home Affordable Refinance program:
“A federal program to allow borrowers with little or no equity in their homes to refinance is struggling to gain traction, according to government data released Tuesday, showing that only 93,070 borrowers have been helped since the effort was launched in April.
The program has encountered difficulties that government regulators had not expected, such as the limited capacity of lenders to carry it out and the large proportion of borrowers who could not initially qualify because their home values had fallen so sharply.”
Given that there were/are multiple indices available showing annual double-digit percentage declines in home prices for the last three years, to say this problem was unexpected and could not have been anticipated is an extreme reach, as was the Obama administrations estimate that “up to 7 million” homeowners would benefit from this program.
To put a local perspective on this – Yesterday’s Case Schiller Home Price Index showed [great chart via CR] a 31.9% drop in Twin Cities home prices since the peak in September 2006. That means a home purchased three years ago to the day, with 20% down, is likely worth 5-10% less than the underlying mortgage. Under current rules, refinancing is either impossible, or undesirable, given the rate and cost adjustments (imposed by Fannie/Freddie) due to the lack of equity.
Beyond home price declines, the program’s poor results have been excacerbated by resistant mortgage insurers, who almost universally will not re-insure a loan refinanced under these expanded rules, and second mortgage lenders, who often stand in the way when refinancing with little or no equity. The result is an environment where it is nearly impossible for otherwise rock-solid borrowers (who happen to have mortgage insurance or a second mortgage) to reduce the interest rate and payment on their primary mortgage.
A recent expansion of the rules at Fannie and Freddie – increasing the allowable loan-to-value ratio from 105% to 125% (meaning, you could refinance a loan of $250,000 on a property worth only $200,000, versus $210k/$200k before) will likely encounter similar problems.
Already we know:
- That many major institutional lenders will not adopt these expanded rules. At all.
- Those that will must pass on substantial rate and/or fee hikes (imposed by Fannie or Freddie) to customers.
- Counterparties (mortgage insurers, second lien holders) will play pig.
- Ongoing price declines will to shrink the pool of refinance-eligible homeowners.
With all of these roadblocks, a good result will be another 93,000 refinances, even under the expanded rules.
Eventually, these programs may allow a refinance regardless of equity, so long as the loan has been paid on time, but it may be too little, too late if rates rise before that happens, and the powers that be have proven to be nothing if not behind the curve on this.
Lack of Equity Slows Federal Aid Program [Washingtonpost.com]