Obama revamps refinance loan modifications

The Obama administration announced changes to the Making Home Affordable program this week, aimed at helping home owners who are severely “underwater” with their property values. The government continues to try and fix the housing crisis without addressing the crux of the issue, altering mortgage balances. The government announced on Wednesday that the refinance guidelines in the MHA program would be altered to allow for loan to value ratios to move from 105% to 125%.

The changes, announced by Secretary Geithner are likely a reaction to the recent home foreclosure reports that are showing properties are continuing to more into foreclosure at a record pace. The housing market has been battered by bank owned properties and home foreclosures, which sell for twenty to forty percent below comparable property prices within their marketplace. The surge in home foreclosures over the last twelve months has led to one of the largest declines with home values, and markets such as California, Arizona and Florida are amongst the hardest hit areas.

There are a growing number of critics who don’t believe that the government’s actions will be aggressive enough to slow down the foreclosure spiral. They point to the original goal of helping five million homeowners refinance their mortgages, with less than 80,000 applications take to date. The record low mortgage rates that the market has benefitted from this year has been an asset to helping home owners refinance their mortgages who have equity or elect to refinance into an FHA mortgage loan, but homeowners who don’t qualify for a conventional loan and are turning to the MHA programs have reported numerous stumbling blocks with their lenders and servicers. The challenge is a homeowner who is upside down, must work in conjunction with their lender and either Fannie Mae or Freddie Mac to help refinance their mortgage. The process which is taking upwards of ninety days is failing to provide the relief to homeowners who need help the most, during one of the worst economic periods.

The major complaint with the governments approach is that it does nothing to address the balance of current mortgage loans. Altering or reducing the principle balance of a mortgage is likely the surest way to help stabilize the housing market. Home owners have increasingly decided to simply walk away from their homes, rationalizing the damage they will do to their credit is a better decision than paying back a mortgage balance that is forty to eighty percent higher than their homes current value. Historically, homes appreciate between two to five percent, and a consumer can generally restore their credit in 3-5 years, figuring they are better off financially with ruined credit but out from under a mortgage on a property that could take ten years or longer to reach breakeven on. Without addressing principle balance reductions, there is little reason to believe the latest government actions will have any meaningful impact at reducing foreclosures this year.