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Sunday, May 11, 2008

Help for the underwater

From a Wall Street Journal article comes this story of some help on the way for hapless homeowners. Fannie Mae is preparing to introduce by midyear a program of refinancing mortgages for people who owe more than the current value of their homes, a situation known as being "underwater."

The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S. It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal -- something many lenders are reluctant to do. Fannie's refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.

Officials of Fannie Mae, a government-sponsored provider of funding for home loans, said the new program is limited to people who have kept up on their payments so far and whose loans are owned or guaranteed by the company. Normally, it is impossible for underwater borrowers to qualify for refinancing because the collateral isn't worth enough to support new loans that would let them fully pay off the old ones. But Fannie officials say in some cases it can make sense to refinance such people if the new loan will reduce their interest rate or let them lock into a fixed rate rather than risking future upward adjustments.

The program will allow refinancing loans of as much as 120% of the property value. Fannie Mae officials project that 150,000 households could qualify for such refinancing. Rather than reducing the principal due on the loan and taking an immediate loss, Fannie is betting that these people will be able to keep up on their new loans and prices will recover (which is what many of them have been saying too). The National Association of Home Builders and the National Association of Realtors praised the program, and many politicians have been pushing Fannie and rival Freddie Mac to do more to help borrowers. So, if you have a Fannie Mae backed loan now and are underwater on the value of the house, watch this summer for this program.

If you’re shopping for a house this summer, I’d certainly advise getting pre-approved for an FHA loan (if the house is under $300,000), since the FHA rates are great and you can put as little as 3% down on the house. There are even programs, which you may qualify for, to have that 3% paid by the seller. So, don’t give up on home ownership. It still beats renting by a long shot and you’d be surprised how many programs are still out there to help make it happen for you. What’s not there any more are the no doc, no down payment, 100% financing programs that ended up getting so many buyers into foreclosure trouble. And that’s a good thing.

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