More Arizonans can refinance for underwater mortgages under new plan

Many homeowners will be able to find out next week how to seek refinancing, no matter how underwater they are on their mortgages.

A federal mortgage program announced by President Barack Obama three weeks ago will smooth the refinancing process and overcome hurdles that so far have blocked many in Arizona and elsewhere from lowering their interest rates and mortgage payments.

In an interview with The Arizona Republic on Thursday, Department of Housing and Urban Development Secretary Shaun Donovan said full details of the program will be released Tuesday.

Donovan said officials are working to cut fees associated with refinancing by half or more and creating much less stringent requirements for qualifying, including eliminating credit checks.

The program's main intent is to assist homeowners who want to refinance to current mortgage rates. On a $250,000 mortgage, a switch from a 6 percent rate to the current rate of about 4 percent would cut the monthly payment by $300.

But many metro Phoenix homeowners have been unable to refinance because of plunging home values. In a typical deal, a bank would not issue a new loan unless the home's current value was enough to cover at least the amount of the loan. Since 2009, a federal program has allowed some homeowners to refinance for as much as 125 percent of their home's value.

But in metro Phoenix, where values have dropped more than 60 percent since 2007, many homeowners still couldn't qualify.

Estimates show nearly half of Arizona's mortgage holders are underwater.

The new program, as laid out by the president, would be open only to homeowners who are current on their payments or have missed no more than one in the past year.

It applies only to those with mortgages backed by government-owned mortgage giants Fannie Mae and Freddie Mac, but the two entities back more than half of all mortgages, meaning many homeowners are likely eligible.

Refinancing to lower payments could prevent more homeowners underwater on their mortgages from walking away and adding to the foreclosure crisis.

"We continue to work on the foreclosures problem, but we want to make sure to help those people paying their mortgages, even when they owe so much more than their is home is valued at," Donovan said.

Donovan was in Phoenix, just two days after Treasury Secretary Timothy Geithner visited the region, to talk to government and housing leaders about programs within Obama's American Jobs Act, which was voted down in the Senate.

The HUD secretary spent part of the morning touring a south Phoenix neigborhood that received federal Neighborhood Stabilization funds. Donovan was promoting Project Rebuild, which was part of the job bill.

He said Project Rebuild could create thousands of jobs and rehab almost 9,000 homes statewide.

U.S. Rep. Ed Pastor, D-Phoenix, said neighborhood assistance is key in the area.

"When you have foreclosures, what happens is it not only hurts families, but it has an effect on the neighborhood, on the schools, on the businesses around it," Pastor said.

After the tour, Phoenix Mayor Phil Gordon noted the region needs as much as anywhere in mitigating the effects of the housing crash.

"Phoenix got hit as hard or harder than anyone," he said.

The refinancing plan is an expansion of the Home Affordable Refinancing Program, which previously allowed refinancing up to only 125 percent of a home's value.

On Thursday, Donovan laid out five hurdles the government had to overcome to expand HARP.

1. Find a market for mortgages with loan-to-value ratios above 125 percent, the old limit on the program.

Currently, most loans are bundled together as securities and resold to investors, who make money off homeowners' interest payments.

But the market doesn't currently deal with loans that are underwater from the beginning. Donovan said the federal government will either create new securities to sell to investors or add a portfolio to hold the loans in.

2. Cut the cost of refinancing.

Donovan said federal officials will approve automated appraisals so they don't cost homeowners. They also are negotiating with title firms to cut their fees by at least half.

3. Prevent second mortgages from stalling the process.

Currently, banks that issue second mortgages can object to a refinancing deal on the original loan. Donovan said many second-lien holders have held up refinancings by trying to gain some leverage or cash in the deal.

Federal officials negotiated with lenders, Donovan said, persuading the top five U.S. lenders, which hold 60 percent of the nation's second mortgages, to allow the deals on first loans so the refinancing program will work.

"In some cases, lenders agreed purely out of self-interest," he said. "If borrowers have smaller payments on their first mortgage, they have more funds to pay their second mortgages."

4. Reduce the risk for lenders.

Fannie Mae and Freddie Mac help lenders issue more mortgages by buying up those mortgages after they are written. But recently, the mortgage giants have attempted to force banks to buy back problematic loans. Under the new program, Fannie Mae and Freddie Mac will agree not to force such buybacks except in cases of fraud. This will also make the refinancing program more competitive. Lenders can seek new business through refinancing without taking on a new liability.

5. Reduce the risk for mortgage insurers.

The program will allow for mortgage insurers to transfer a policy from the borrower's old loan to the newly refinanced loan easily and with little or no fee.

The final guidelines for the program will be out next week, which will tell homeowners how to apply.

While much government mortgage aid has intentionally tried to exclude investors and landlords, the new program also will be open, in some cases, to people who have a mortgage but don't live in the home.

People who now rent out their homes because they couldn't afford the payments or had to move for a job will also be eligible, Donovan said.

Still, he made it clear that investors, who bought homes solely to use them for rental or investment income, won't qualify.

Homeowners can check to see if their loan is backed by Fannie Mae or Freddie Mac by going to www.makinghomeaffordable.gov.

The program is available to borrowers with loans backed by Fannie Mae or Freddie Mac in 2009 or earlier.

Borrowers don't have to refinance through their original lender and could likely get offers from others.

Donovan made clear it doesn't matter if a homeowner is 100 percent underwater or 200 percent underwater because Fannie and Freddie are already carrying that risk on their books. He said what is important is that the borrower has been paying and deserves to be rewarded for it.

Full credit checks won't be run on eligible borrowers because they have been making their payments, another move that will save costs. In some cases, lenders might call a borrower's employer to see if he or she still has a job, he said.

"We want this program to spread beyond Fannie and Freddie loans," he said "Now, we are talking to lenders about refinancing underwater borrowers on loans the federal government isn't involved in."

by Catherine Reagor and Maria Polletta The Arizona Republic Nov. 11, 2011 12:00 AM




More Arizonans can refinance for underwater mortgages under new plan