Making Home Affordable expanded again - borrowers allowed to refinance loans up to 125 percent of value

by Xin Lu on 2 July 2009 17 comments

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.

Example 1:

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.

Example 2:

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?
 

1
Average: 1 (1 vote)
Your rating: None
ShareThis

comments

17 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Andrew M

Wow! Isn't this what got us into this mess in the first place? If these mortgages in trouble now are not allowed to fail now they will just fail in the future. Seems like a theme nowadays.

Guest's picture
Guest

Just closed my refinance today. Locked in a few weeks ago with a 4.375% rate for 15 years with 1.5 points. After the drop in value, we still had a small amount of equity. I think this will look better and better as each day passes.

Xin Lu's picture
Xin Lu

Guest, did you have a regular refinance through your lender or is it through the Making Home Affordable program?  I'm interested to know.  since you said you still have equity left I'm guessing you're not one of the people who need to refinance 125% ltv

Guest's picture
Marilyn

I think we are not done yet with home value declines. Too many people are unemployed. The stock market has zoomed up but why? Let's see what the fall brings. I do think in a year from now we'll be in a better place.

125% doesn't cover the amount already lost by homeowners.

Guest's picture
ctreit

Many of the programs are more of the same as is this one. I would think it is time to change the tune and go down a different road.

Guest's picture

In my opinion, your house and your stock picks should have one thing in common: They should both be considered long term investments. If the homeowner picked a home in a decent neighborhood and it has all the features they need, then there is no reason to believe that it's value won't increase by the extra 25% over the next 5 to 10 years. If the loan amount means payments higher than they can afford, they purchased too much house to begin with and borrowing more money you can not repay will not fix the problem. Selling your home, or your stocks, just because they are suddenly valued at much less than your purchase price is pretty much like admitting you made a bad choice to begin with and want to compound that error by not giving that asset a chance to recover. A refi on a home isn't going to make the payments much more favorable unless the new loan is at a better interest rate. My hope is that the new 125% loans slow foreclosures, but that is not too likely, except in a few cases where a new loan drops the total monthly payment. Let's all pray that we aren't encouraging another round of reckless borrowing.

Guest's picture
Nigel Watson

Worse. Problem is, there's no there there. Our present economy is finished. When we emerge from this long, dark tunnel, American (assuming there is still an "American" state) society will be unrecognizable to its former, coddled inhabitants.

The Obama admin's attempts to prop up our housing "industry." and all our other whipped cream enterprises, is like trying to get a scarecrow to wave away the crows, unaided.

There is no going back to our predatory, rapacious ways. All we can really do is to watch our unraveling - on just about every level - and prepare for a new beginning. And, oh yes, don't forget to duck.

Please see Kunstler, Heinberg, Korten, Savinar, et al. for further elucidation.

Great site!

Guest's picture
cwaltz

For some reason I am thinking the two examples you cite would be excluded because of the loan amounts. I believe there was a cap on the maximum allowable well under the half a million threshhold. I'm thinking this because I remember thinking that California residents were pretty well and truly screwed since there was major property inflation out there and housing is and was incredibly expensive in their market.

Xin Lu's picture
Xin Lu

Hi cwaltz,

 

You are right in saying that the loan amounts in my examples are quite large.  That's because the jumbo loan limit in certain areas of California is pretty high.  In San Mateo county the limit is 625k.

Guest's picture
Guest

Naked capitalism blog makes the following point:

Here are two points to consider.

1. In the state of California, you can just walk away because first mortgages on primary residences are non-recourse. That means that the mortgage is only secured against the house you have bought.
2. However, in the state of California, refinance mortgages are recourse loans. What does that mean? It means you are on the hook for that loan. You cannot just walk away. The bank can come after you and take your car and the stocks in your E-Trade account. They can garnish your wages. They can even take your clothes and the shirt off your back, literally. The only thing they can’t touch is your 401-K. But it’s down 40% anyway.

Why would you trade a non-recourse loan from which you can walk away for a recourse loan that guarantees you’ll end up as bad as some poor slob at Tappahannock? It doesn’t seem like an incredibly appealing choice, does it?

This article also points out that if you take this step, you may want to be sure that you don't want to move in the next 13-17 years:

http://seattlebubble.com/blog/2009/07/02/125-refinance-pricing-you-in-fo...

Guest's picture

In general, if you plan to stay in the house and can afford the payments, it should be worth it to you to take the 125, as long as your house payment will decrease, and you aren't adding any closing costs or escrows or anything else to the new loan balance.

But here is pure speculation on my part, based partially on post #9. Since this is a government sponsored program you will probably be more on the hook than you will be with your current mortgage, even if you don't live in California.

Your current loan may be underwater because of the market plunge, and it'll be easier to deal with if you have to short sell. On the new 125s rest assured there's some language buried deep in the fine print that will require that you surrender your first born and all of your wordly possessions in the event that you sell within X number of years or are otherwise unable to payoff the loan in full. (Technically, that's true with all mortgages, but it isn't usually enforced--Calif uses Deeds of Trust which don't include the recourse provision.)

I wouldn't be the first one to take one of these loans, not until they're fully understood and have been at least a little time tested.

Guest's picture
Guest

I'm the person who posted the original article about non-recourse loan. I'm not an expert, but according to here, all refinance loans are non-recourse:

http://www.nonrecourselending.com/non-recourse-lending.php

"The law is different in every state, in almost all cash out refinance loans these are almost always a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of ways to get that money back."

These tends to agree with the above:

http://banking.about.com/od/loans/a/recourseloan.htm
http://www.forecloseddreams.com/deficiency-after-trustee-sale

Regardless, I agree that I can't see the Fed Gov. doing this without making it recourse.

This website lists states with anti-deficiency laws (where they can't pursue you for the balance if you walk away) and hence by refinancing you are likely to make your situation worse:

http://www.helocbasics.com/list-of-non-recourse-mortgage-states-and-anti...

Alaska, Arizona, California, Connecticut, Florida, Idaho,
Minnesota, North Carolina, North Dakota, Texas, Utah,
Washington

Notice the list contains some of the top hotspots for house prices drop. It's possible that the ability to walk away in these states may be part of the reason...

Guest's picture
wildgift

maybe 125 works out in the midwest, not in California, where the bubble was big.

we still have to see the prices knocked down in santa monica

our bubble was huge. i've seen houses priced at over 500k now asking for 230k, and probably won't sell for more than 200k. there's no 125% in that. this is in a working class neighborhood.

Guest's picture
Kelja

There can't be anyone out there that doubts Obama is in bed with the Banksters. This is outrageous but it doesn't raise a whimper.

Capitalism is dead.

Guest's picture
Guest

I have lost almost everything because of what these bankers have done. I am retiring this year and will have almost nothing to live on for the rest on my life.
I think it was Micheal Moore who did the math, calculating that if Obama had just used the money that he gave to the banks to help the homeowner's, he would have been able to help every one of the distressed homeowners with plenty of money left over. All the money went to the banks and Obama's housing plan has helped only 1000 homeowners!
But like you said, I guess I am more disappointed with the American people for just letting Obama and the bankers continue to screw us.
We could take some instruction from the Iranians who at least stood up by the millions to protest the corruption in their country. What are we doing?
It is truly time for a revolution!

Guest's picture
Peter T

> Will this help consumers or just worsen the situation?

It will help the banks to avoid writing down the values of their assets. Instead the taxpayers get burdened with the risk of the mortgage default (Fannie, Freddie, FHA are all guaranteed by the taxpayers now). The US government is currently of the banks, by the banks, for the banks, and so it is hardly surprising that they want to limit the banks' losses and allow them continued bonuses and high salaries to their executives, instead of an unwelcome transparency. That is good for the members of congress, too, whose largest campaign contributors are from Wall Street.

Guest's picture

When this happened in the UK it led to the complete meltdown of the mortgage industry. Lending above the value of a property is never a good idea, even if the market is booming because we all know what could happen...