Government greenlights more underwater refis

Based on the comments about an
earlier post
covering a government-assisted mortgage refinancing program, I don't think you're going to like the latest news out of Washington.

Late last week the Obama administration loosened the eligibility rules for the refinancing arm of its Home Affordable Plan, designed to help home owners who want to take advantage of lower interest rates but haven't been able to refinance. As a result of the change, home owners whose first-mortgage balance is up to 25% higher than their house's value can qualify for the federal refi program. When the program launched a few months ago, the upper limit was 5% under water, but that proved too stringent; the government raised the LTV ratio to 125% because not that many folks were qualifying for the program that the Administration launched with expectations -- hopes? -- of helping up to 4 million homeowners.

In making the official
125% LTV announcement
, the Federal Housing Finance Agency added that it is “incenting” these borrowers to get out of their negative-equity morass sooner rather than later. But it turns out the incentive is nothing more than suggesting that folks choose a shorter mortgage term -- say, 25 years rather than 30 years -- and thus qualify for a slightly lower mortgage rate.

That’s not exactly a rip-roaring special incentive. It is no different than the incentive all lenders offer all borrowers who opt for a shorter term, whether part of a federal bailout program or not. The typical spread between a 30-year fixed-rate mortgage and a 15-year mortgage, for instance, is one-half a percentage point; Freddie Mac’s most recent mortgage survey reports an average rate of 5.4% on a 30-year fixed-rate and 4.87% for a 15-year. In essence, the special “incenting” held out by the FHFA seems to be nothing more than now allowing folks to take advantage of a common industry practice: Choose a 15-year, 20-year or 25-year mortgage and you will be eligible for a lower interest rate than if you choose a 30-year term.

And you really have to wonder how enthusiastically home owners will jump at taking on the higher monthly payments that accompany a shorter-term loan. Are we really to expect that someone up to 25% under water is in a rush to build up equity? Or, as is more likely, are they turning to Home Affordable to get their current monthly costs as low as possible so they can stay in a home they might otherwise not be able to afford?