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!
"I am pleased to join Secretaries Donovan and Geithner in announcing this expansion of the Obama Administration's Making Home Affordable program," FHFA Director James Lockhart said in a press release. "The higher LTV refinancings will allow more homeowners to strengthen their finances by taking advantage of lower mortgage rates. The Enterprises are also incenting these borrowers to combine a lower mortgage rate with a faster amortization schedule, which will enable them to get 'above water' on their mortgages more quickly. This program could assist many homeowners who otherwise would have difficulty refinancing due to declining house prices," Lockhart said.

The idea is that by making the new loans 20- to 25-years in duration, borrowers will pay down the principal quickly and, after a few years, will no longer be upside down by the same magnitude.

The loser is, of course, the taxpayer -- sound familiar? -- now on the hook for mortgages to people with a history of financial problems who now owe more on the home than it's worth.
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