If you have a mortgage for more than the value of your home, then you cannot refinance the whole amount with a new lender, because (nowadays, anyway) lenders are smart enough not to have a loan-to-value ratio over 100 percent on a new loan. This prevents you from taking advantage of lower mortgage interest rates by refinancing your loan.
The Obama Administration has tried several initiatives to try to assist borrowers in this situation. The latest was announced today, now targeted at mortgages held privately (rather than by government entities, for which a similar program is already in place and underutilized). Here’s the scoop from The Washington Post:
Half of all U.S. mortgages — about 30 million home loans — are owned by nongovernment lenders.
The new administration plan would permit homeowners to refinance their mortgages into loans backed by the Federal Housing Administration. To qualify, borrowers with privately held mortgages would have to have no more than one delinquency in the six months preceding refinancing. Their loans would have to fall within the mortgage limits set by the FHA in their home counties.
The administration would encourage borrowers to apply their savings directly toward lowering the principle [sic] of their loans instead of reducing their monthly payments. As an incentive, borrowers who choose to rebuild equity would not have to pay closing costs and would have to agree to refinance into a loan with a 20 year term or less with monthly payments roughly equal to those they make under their current loan.
The cost of the program is projected to be $5 – 10 billion, depending on how many people participate. Call me crazy, but this one hardly seems worth the effort.
Remind me again why the federal government has to get involved here. Are the borrowers delinquent on their loans? No, by stipulation. Are we doing this for added stimulus? No, the program prioritizes principal reduction and shortened terms rather than lower monthly payments. All that happens here is that the FHA takes on $5 – 10 billion of exposure, bank balance sheets shift toward cash and away from some of their riskier assets, and some homeowners emerge with lower debt.
Higher federal debt, lower private debt. Bailout. Pointless. Denied.
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