A government program designed to help at-risk homeowners refinance their mortgages is struggling, even as conventional mortgage refinances have surged in response to historically low interest rates.

The Obama administration's Home Affordable Refinance Program has so far reached only 3 percent of the homeowners it was supposed to help, the Washington Post has reported. The program has so far helped only 130,000 homeowners refinance their mortgages, out of 5 million that the administration originally said it would assist.

The Home Affordable Refinance Program is the second, and less visible, part of the administration's Making Home Affordable Program designed to help homeowners avoid foreclosure in the face of the current economic crisis. The Home Affordable Modification Program, which helps homeowners in financial difficulty modify, rather than refinance, their mortgages has been the more visible and successful of the two, helping 500,000 homeowners obtain loan modifications as of Oct. 1.

For the refinancing program, a big part of the problem has been that many homeowners owe more on their mortgages than their home is worth, due to declining property values. Although the program, which was launched in March, initially offered to refinance up to 105 percent of a home's current value, many homeowners are too far "underwater" on their mortgages to qualify even for this assistance. It's currently estimated that about one-third of U.S. residential mortgage holders have a mortgage balance that exceeds the current value of their property.

More help for underwater homeowners

It's hoped that recent changes to the program will make it accessible to a wider range of borrowers. New rules allowing the program to refinance mortgages at up to 125 percent of a property's current value took effect last month for Fannie Mae-backed loans and this month for mortgages backed by Freddie Mac. However, it's too soon to see what impact the change may be having.

The window of opportunity for the program to assist homeowners may be narrow, however. Though 30-year mortgage rates recently dropped below 5 percent once again for several weeks, according to data from Freddie Mac and the Mortgage Bankers Association, they have begun edging upward again the past two weeks and there are signs that they may continue moving upward.

If rates should, as some analysts expect, return to the 6 - 6.5 percent level where they stood for much of 2008, the incentive to refinance will be significantly reduced. Already, the Washington Post reported, many homeowners who could have qualified for a refinance under the Making Home Affordable Program have declined to do so, because of closing costs and the higher fees charged to homeowners with little or no equity in their homes.

Conversely, an estimated 3 million mortgages have been refinanced so far this year outside of the Making Home Affordable Program by homeowners able to obtain regular financing, according to Treasury Secretary Timothy Geitner. Administration officials estimate that those refinancings, which were spurred by low interest rates brought on by government intervention, have put about $10 billion in purchasing power into the economy.

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Published on October 7, 2008