Refi Out of Reach

Recently there have been some headlines suggesting that the Obama Administration is working on a program to help underwater homeowners refinance to lower rates. These news stories have made the phones of thousands of mortgage loan originators ring. Unfortunately most of the calls end with, "I'm sorry there is nothing I can do to help you right now."

In 2009 the federal government rolled out the Home Affordable Refinance Program (HARP) which is designed to do what the current headlines propose. A homeowner can be as much as 25% underwater on their current loan and still be eligible for a refinance, but only if their current mortgage is owned by Fannie Mae or Freddie Mac. There are some discussion of a new program that expands the HARP guidelines, but there doesn't seem to be anything of substance at this time.

Something that needs to be addressed are adjustable rate mortgages or ARMs. There are a lot of homeowners that can only afford their home because they have an ARM today, and that rate has adjusted so low (sometimes below 3%). However, their interest rate will begin to adjust up in future years. No one knows exactly when, but Fed Chairman Ben Bernanke states that rates will remain low through 2013.

For discussion sake, let's say that rates drive up several points by 2014. Those ARM homeowners will see their payments shoot up, and they better have increased their income by then in order to keep up with their payments. Also, many of these ARM loans are not owned by Fannie Mae or Freddie Mac, so a program that allows them to refinace can help to avoid future defaults down the road. If the government wants to avoid more foreclosures, then this is something they should implement.