The Obama Administration's Making Home Affordable Plan may soon increase its limits on refinancing "underwater" mortgages to allow more homeowners to take advantage of the program, according to the director of the Federal Housing Finance Agency (FHFA).

FHFA Director James Lockhart said the administration is considering whether to loosen the program's rules to allow refinancing of mortgages in which the homeowner owes more than 105 percent of the property's value, the current limit under the program. The disclosure came during remarks Lockhart made last week to a meeting of real estate writers and editors, according to Bloomberg News.

Could boost limit to 125 percent of home value

Lockhart said the administration has been discussing raising the maximum loan-to-value ratio to 125 percent of the home's current market value, Bloomberg reported, though he said that may not be the final number they settle on.

About 80,000 mortgages have been refinanced to date under the Making Home Affordable Plan, which was unveiled in March as part of the administration's strategy to help homeowners avoid foreclosure. The administration said the program could help 4-5 million financially stressed homeowners by enabling them to refinance high-cost mortgages at the lower rates currently available.

The program has been beset by a number of difficulties, a major one being that many borrowers have seen their homes decline significantly in value, so that they owe more than the current 105 percent loan-to-home value maximum. The proposed increase would make the program available to more borrowers, but it remains to be seen if lenders, for whom the program is voluntary, will embrace the change. Much will depend on the incentives provided for lenders to refinance at the higher rate.

Rising rates may dampen appeal

The program's appeal has also been diminished by the recent rise in mortgage interest rates from historic lows in the upper 4 percent range (for 30-year fixed rate mortgages) to current averages around 5.5 percent and above. Even so, the current rates still remain below historic norms and may remain attractive to many who obtained mortgages in the 6.5 to 7 percent range over the past decade, or who have adjustable rate or zero-interest mortgages that are due to reset.

To be eligible to refinance their mortgage under the Making Home Affordable Plan, homeowners must have good credit and a mortgage that is owned or guaranteed by government-backed lenders Fannie Mae or Freddie Mac, which applies to most U.S. mortgages. Borrowers who do not qualify for a refinanced mortgage may still be able to obtain a loan modification under Making Home Affordable. Under a loan modification, the homeowner stays with their current mortgage, instead of refinancing into a new one, but the terms are adjusted to make the payments more affordable.

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Published on June 22, 2009