New re-fi program for Gov backed mortgages

by sfishome on October 24, 2011

Obama is said to announce a new refinance initiative for under-water homeowners.   If your loan is owned by Fannie or Freddie, and you meet certain “good borrower/credit” criteria you can refinance without an appraisal.

Read the article here.

This program looks to be aimed squarely at those who would otherwise strategically default or do strategic short sales.  The reason I say that is because these are borrowers who are still paying their mortgages, but have loans that are for more than 80% of their home’s value.

Let’s take a not too uncommon example of someone with a home worth $300,000 with a $400,000 mortgage.  They are paying a lot more in carrying costs than their neighbor who recently bought at $300,000 and locked in record low interest rates on a $240,000 loan (20% down) or $270,000 loan (10% down).  Another neighbor renting a similar home is also paying a lot less.   While the under-water owner can afford to continue to pay their much higher monthly costs they often eventually make the “business decision” to simply walk away, or attempt a short sale.  The reason is their only re-finance option is a re-fi that requires a ton of cash beause lenders won’t provide a new $400,000 loan on a $300,000 property.

In this example unless you have the cash to get a 80% loan to value ratio – or a $240,000 loan – which is $160,000 in cash you can not refinance.  With this new program an appraisal is not required, so these borrowers can get a $400,000 loan for around 4%.  If this program works it will mean fewer short sales and foreclosures as borrowers who want to decide, and would still be paying more than their neighbors, are able to bring down their monthly costs without coming up with cash.

As a side note, this should be stimulative to the economy as money is diverted from lenders and is likely to be spent on other goods and services.

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