Another Housing Rescue Plan—Will This Time Be Different?


By: Dr. Lynn Reaser

The Administration this week announced a new program aimed at assisting “underwater” homeowners (whose homes are worth less than their mortgages) to refinance.  It will be voluntary for lenders, mortgage insurers, and other industry participants to sign up.

Although operational details may not be released until November 15, lenders may find it worthwhile to refinance loans where loan-to-value ratios have climbed above 125%.  This could especially be true where borrowers might otherwise “strategically default” or abandon their houses even if they are able to make the required payments.  Lenders may target the provision of the new program waiving risked-based fees if the borrower shortens the term of his mortgage.  Hence, lenders could receive almost the same monthly payments although for a shorter time span.

About 900,000 borrowers have refinanced through the first refinancing program, called the Home Affordable Refinance Program (HARP).  Another 900,000 participants in this amended HARP would amount to only about one-thirtieth of the mortgages owned or guaranteed by Fannie Mae and Freddie Mac.  Moreover, the new program will do little to absorb the excess of foreclosed properties still weighing on the housing market.

In sum, this program might provide some assist to beleaguered homeowners but is hardly a panacea.

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