Making Home Affordable expanded again - borrowers allowed to refinance loans up to 125 percent of value
When the Obama administration first announced the details of the Making Home Affordable program in March, the guidelines for the refinance portion stated that the loan refinanced cannot be more than 105% of the value of the home. Now a new expansion of the program allows the loan to value ratio to be up to 125%. Will this help consumers or just worsen the situation?
This is actually the second expansion of the mortgage plan since March. The first expansion allowed people with second mortgages to modify or get rid of their second loans. Here are some examples of what this new change means for borrowers.
Original home value: $600,000
Current loan amount: $480,000
Current home value: $450,000
Loan to value ratio: 106.7%
In this example the borrower would not have been able to qualify for the original plan since the current loan to value ratio is above 105%, but the new change allows this borrower to apply.
Original home value: $500,000
Curent loan amount: $480,000
Current home value: $380,000
Loan to value ratio: 126.3%
In this example the borrower still would not be able to qualify for the refinance program since the drop in home value made the loan amount to be above 125% of the value of the home.
Some changes have occured in the mortgage market since March. First, the 30 year fixed mortgage interest rate has risen by almost a whole percentage point. Additionally, appraisal rules have been tightened so it is possible that appraisals would come in lower than expected. Since the Making Home Affordable Refinance plan does not help borrowers pay any fees on the refinance it may not be worthwhile to go through the process if your mortgage rate is not significantly higher than the market rate.
Finally, it is unclear how successful the Making Home Affordable program is right now since it has been only a few months and there is no official published data on the total effects yet. I think the fact that they are constantly loosening the guidelines is not a good sign. Additionally, it seems foolish to allow Fannie Mae and Freddie Mac to continue refinancing debt that they know is bigger than the underlying collateral. This is worse than 100% financing because it is 125% financing. However, if this encourages borrowers to stay away from default, then I guess it is good for the lender.
What do you think? Will this new expansion help you get a lower rate on your mortgage or do you think this program will worsen the current situation?