Can I Refinance, if I Owe More than My Home is Worth?
Mortgage interest rates are at record lows. Borrowers refinancing a loan or getting a mortgage to purchase a home can take advantage of rates so low that they almost sound unreal.
Even as rates have plunged, millions of borrowers have been unable to refinance. There are a number of reasons borrowers can't refinance, including:
- Poor credit- Millions of Americans have seen their credit scores drop. As a result of the economic problems of the past few years, including a drop in wages and a rise in unemployment, more people missed payments on their debts or ran up debt on their cards to a level that harmed their debt-to-income (DTI) ratios. With a lower credit rating than they had when they took out their original loans, they no longer qualify for a loan.
- Tight lending requirements- Lenders tightened lending requirements. At the same time that more borrowers struggled, many lenders started requiring higher credit scores and lower DTIs, reducing the number of qualifying borrowers.
- Fewer loan programs- Borrowers no longer have access to the kind of sub-prime loan options that were available previously (and which lead, in part, to the housing crisis).
- Plunging property values- A dramatic drop in housing prices, in many parts of the US, left millions of homeowners owing more on their homes than they are worth. Without sufficient equity, borrowers were shut out from the refinance market.
Of all the factors listed above, the biggest barrier to refinancing has been the lack of equity. At the peak of the housing crisis, when property levels were at their lowest, over 12 million homes were worth less than what was owed on them. Even now, there are almost 11 million homeowners "underwater."
The government has tried a few different methods and programs to help underwater borrowers. The hope has been that if millions of borrowers could save hundreds of dollars a month that their savings would be spent in the general economy, giving it a huge boost.
Federal Reserve Actions
The Federal Reserve has taken specific actions to keep interest rates low, including:
- Lending to financial institutions
- Providing liquidity to key credit markets
- Purchasing billions of dollars in longer-term securities purchasing
The Fed is committed to taking further actions, as necessary, to keep rates low into 2014.
Original Government Programs
The government has introduced new loan programs and expanded existing programs to give underwater homeowners a chance to save money by refinancing. Some programs were aimed at borrowers who were making their monthly mortgage payment as agreed, and other programs were aimed at borrowers facing foreclosure, either unable to make their payments or struggling to do so. Some programs have succeeded, while others have not.
The initial government programs included:
- Making Homes Affordable (MHA)- MHA, introduced in 2009, was an early step by the Obama Administration to address the housing crisis. MHA consisted of two main parts:
- HAMP (Home Affordable Modification Program)- HAMP aimed to modify a borrowers mortgage, giving them a more affordable mortgage payment, reducing the risk of foreclosure.
- HARP 1.0 (Home Affordable Refinance Program)- HARP opened the opportunity to refinance to underwater or limited-equity borrowers with loans backed by Fannie Mae or Freddie Mac. In its original form, known as HARP 1.0, the program was restricted to borrowers with a loan-to-value (LTV) of less than 125%. This is one key reason that it did not help as many borrowers as hoped. When HARP 1.0 was announced, the goal was to assist 4 million borrowers, but it only helped about 900,000.
- FHA Short Refinance- The FHA short refinance gave borrowers who did not already have an FHA loan a chance to refinance in to an FHA loan. However, the program required lenders to forgive at least 10% of the principal balance, which very few lenders were willing to do. The program has been a big failure.
New and Expanded Loan Programs
Due to the lack of success of the first round of government programs, new programs were introduced and existing programs were expanded. The programs with the biggest impact have been:
- HARP 2.0- Rolled out in late 2011, HARP 2.0 removed the LTV requirements from HARP 1.0, while also easing credit and debt-to-income requirements. Lenders were also given assurances to encourage them to make loans. HARP 2.0 has helped about another 500,000 so far, as of mid-2012, but still has not worked as hoped. Lenders have applied stricter requirements, known as overlays, than either Fannie Mae or Freddie Mac require.
- FHA Streamline Refinance- The FHA Streamline program was expanded, removing the LTV restrictions that previously existed that excluded underwater homeowners. Now, a severely underwater borrower with an FHA loan can refinance at today's low rates, as long as the mortgage is current, there are no late payments in the past 6 months, and no more than one in the past 12 months.
- VA Streamline Refinance- The VA Streamline refinance loan program was expanded, similar to the FHA, so underwater borrowers can refinance at today's low rates.
Future Expansions of Loan Programs
Even with the expanded programs listed above, millions of underwater borrowers are not able to refinance. These include borrowers who don't have loans backed by Fannie, Freddie, the FHA, or the VA, as well as borrowers who are not finding a lender to work with them, despite meeting the general program requirements. There is still a lot of pressure to help these borrowers. Some ideas have been proposed, but nothing has been put in place.
There is no formal HARP 3.0 program. However, the term HARP 3.0 is being used to describe the next generation of loan programs that will further expand refinancing opportunities. Examples of HARP 3.0 proposals are:
- The Obama #myrefi progarm- The Obama #myrefi program expands refinancing opportunities to borrowers with a private loan, at least fair credit, and a good mortgage payment history. The #myrefi program would require a streamlined application process, no appraisals, no tax forms and less red tape.
- Boxer-Menendez bill- Senators Barbara Boxer and Robert Menendez have proposed the Responsible Homeowner Refinancing Act to further expand the number of homeowners eligible to refinance at today's low rates. The Boxer-Menendez bill would be restricted only to Fannie and Freddie borrowers, so it is described as an expansion of the existing HARP 2.0 program. If passed into law, it would:
- Eliminate up-front fees completely on refinances
- Eliminate appraisal costs for all borrowers
- Further streamline refinancing application process
What's an Underwater Borrower to Do?
If you own a home that is worth less than you owe on it, you need to form a plan of action. Your first task is to see if you fit into any of the existing programs. Start by determining whether your loan is backed by Fannie Mae, Freddie Mac, the FHA or the VA. If so, you could be eligible to refinance right now.
If you have a government backed loan, but don't qualify to refinance, find out why. Don't take being turned down by one lender as a sign that all lenders will refuse to work with you. Different lenders have different requirements, especially when it comes to LTV, DTI, and credit.
If you don't have a government backed loan, keep your eyes on the news. It is certainly possible that one of the ideas already proposed or one yet to be proposed could help you. Make sure that you stay current on your monthly mortgage payments, because a common requirement for any of the expanded refinance programs is that you're current on your mortgage with no late payments in the past 6 months and and have only one late payment in the past year.