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Obama plan to prevent foreclosures enables more homeowners to refinance

May 2nd, 2009 7:34 AM by Lehel Szucs

Obama plan to prevent foreclosures enables more homeowners to refinance

Borrowers who have made their payments on time but are saddled with high interest rates may be eligible to refinance, despite decreases in their property values.
By Kenneth R. Harney
March 1, 2009
Reporting from Washington -- Though the final operational guidelines of the Obama administration's foreclosure-avoidance programs won't be released until Wednesday, key details have begun to surface on the extraordinary refinancing opportunities that will be available to an estimated 4 million to 5 million homeowners whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac.

Under the Obama plan, borrowers who have made their payments on time but are saddled with interest rates well above prevailing levels in the low 5% range may be eligible to refinance -- despite decreases in their property values.

If you applied for a refinancing to take advantage of today's 5% rates -- which would save you several hundred dollars a month in payments -- you'd have difficulty because your LTV, currently at 84%, exceeds Fannie's 80% ceiling.

But under the Obama refi plan, Fannie would essentially waive that rule -- even for LTVs as high as 105%. In this example, you'd be able to qualify for a refinancing of roughly $344,000 -- your present balance plus closing costs and fees -- at a rate just above 5%.

In a letter to private mortgage insurers Feb. 20, Fannie and Freddie's top regulator confirmed that there would be no requirement for refinancers to buy new mortgage insurance, despite exceeding the 80% LTV threshold.

James B. Lockhart III, director of the Federal Housing Finance Agency, described the new refinancing opportunity as "akin to a loan modification" that creates "an avenue for the borrower to reap the benefit of lower mortgage rates in the market." But Lockhart spelled out several key restrictions on those refinancings:

* No "cash-outs" will be permitted. This means the new loan balance can only total the previous balance, plus settlement costs, insurance, property taxes and association fees.

* Loans that already had mortgage insurance probably will continue to have coverage under the existing amounts and terms, thereby limiting Fannie and Freddie's exposure to loss. But loans where borrowers originally made down payments of 20% or higher will not require new mortgage insurance for the refi, despite LTVs over the 80% limit.

* The cutoff date for the program is June 10, 2010.

Lockhart said although Fannie and Freddie would be refinancing portions of their portfolios into lower-interest-rate, higher-LTV loans, he expected that their exposure to financial loss would decline.

"In fact, credit risk would be reduced because, after the refinance, the borrower would have a lower monthly mortgage payment and/or a more stable mortgage payment," Lockhart said. This, in turn, would lower the probability of loss-generating defaults and foreclosures by those borrowers.

Since Fannie and Freddie both operate under direct federal control -- technically known as conservatorship -- any additional losses to the companies would inevitably be borne by taxpayers.

If large numbers of beneficiaries of these special refinancings cannot afford to pay even their cut-rate replacement rates and go into foreclosure, red ink could flow in rivers from Fannie and Freddie.

Since the refi program is a here-and-now money-saving reality, homeowners ought to make the most of it. If you know that Fannie or Freddie owns or guarantees your mortgage -- your loan servicer can tell you -- and you've got an on-time payment record and an interest rate above prevailing levels, start assembling your financial records and get ready to refi.

Posted in:General
Posted by Lehel Szucs on May 2nd, 2009 7:34 AM



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