Fannie and Freddie to allow refinancing up to 125% loan to value
Here's some good news for homeowners who want to refinance their homes and are "underwater". The Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac are authorized to increase the loan to value ratios in the Home Affordable Refinance Program (HARP) from the current 105% to 125% effective September 1, 2009.
From FHFA Director James Lockhart:
“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.”
From the FHFA press release:
"The program provides borrowers with an incentive to reduce the term of their loan from 30 years to a shorter-term, fixed-rate mortgage and therefore pay down the principal more quickly and reduce lifetime interest payments. Borrowers who refinance may see lower monthly payments and a more sustainable mortgage which will reduce the risk of default. This expansion of HARP will assist the Enterprises in managing the credit risk associated with these higher loan-to-value mortgages." (emphasis added)
Now, while all this is helpful, I have a question. What difference does loan to value make when the current homeowner is credit and income worthy and making mortgage payments on time and wants to continue to live in their home.
The lender is already exposed to the risk of a high loan to value loan and might actually reduce that risk by making the mortgage more affordable to the homeowner without considering the loan to value ratio. It might be one less foreclosure for lenders to have to deal with and property values might stabilize if the homeowner didn't feel they had to "walk away" because they are "underwater" or try to sell their home in a short sale (where the lender will take a hit anyway if approved).
And lower monthly payments and reduced risk of default might actually help the economy. 