Fannie, Freddie now allowing loans worth 125 percent of home value

The Obama administration's plan to help struggling home owners refinance ARMs into affordable fixed-rate loans has hit a snag: So many distressed borrowers are upside down on their homes that they can't qualify for refinancing.

Enter the Federal Housing Finance Authority, which announced on July 1st that it had authorized Fannie and Freddie to begin making 125 percent loan to value refinancing loans under the Home Affordable Refinance Program -- the previous max was an already ambitious 105 percent loan to value (LTV).

Under the new plan, someone will be able to refinance a $250,000 loan on a home that is only worth $200,000 which, of course, runs counter to the whole idea of mortgages: How can you make a loan for more than the value of the underlying collateral? That's not a mortgage!