Mortgage Refinancing For Underwater Borrowers Now Available

10 07 2009

Mortgage Refinancing For Underwater Borrowers Now Available

Posted by: admin in mortgage industry

Mortgage Refinancing For Underwater Borrowers Now Available

The Obama administration is furthering its efforts to jumpstart the credit and real estate sector by widening and softening the requirements for home loan borrowers to qualify for mortgage refinancing relief. The specific requirement that has been modified is the percentage of the home loan you must own before you can apply for mortgage refinancing aid.

Until last week all qualifying borrowers must own between 80% and a 105% of their loan. This means that the mortgage must be between the 80% and 105% of the house’s value. This was a rather restrictive requirement, especially in areas where the market went into free fall and home prices dropped by 40%.

The amendment to this requirement means that more loan borrowers, some of those that have been hit worse by the crisis will qualify for refinance aid.

What are the details of this home refinance aid program adjustment?

Eligibility has been expanded to borrowers that owe up to 25% more than their homes are worth. This means that even if your mortgage is 125% of the house’s value, you will still qualify for mortgage refinance aid.

To illustrate:
Imagine (not too much imagination is required) you bought a house for $600,000. You bought an 80/20 mortgage (which means you paid 20% of the house with savings or other finance besides the principal mortgage) which means you were left with $480,000 to pay for. A year after the price of your beautiful home has dropped to $400,000 leaving you $80,000 in the red. Under the previous requirements you would not have qualified for refinance aid as your mortgage was well above the value of your house. With the new eligibility requirements you would qualify because your mortgage is still within the 125% of the market value ($500,000) of your home.
Of course this is not a solution for all borrowers. For those who bought 100% or even 125% loans and then saw prices drop by 20% to 40% in areas like California the latest changes are still not enough to include them.
Critics however say that the limiting factor on this Mortgage Refinance Aid is now not so much the Mortgage to House value index but the requirement that all qualifying loans are backed by Fannie or Freddie. Some analysts point out that it is more likely that the bulk of mortgages that are upside down and in dire need of refinancing aid are those of other products not Freddie and Fannie loans.

An example of this are the cases of Nevada, California, Arizona and Florida where there has been more problem loans and prices have dropped most. In these markets most of the loans were not bought by Fannie or Freddie but were “private” mortgages sold by Wall Street firms to private investors.

The current Obama refinance program will not help those loans. However watch this spot as future amendments to this requirement are very possible as the administration is bending further backwards in their effort of encouraging growth in the credit and real estate sector.

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