Can I Refinance my Mortgage if I’m Underwater and I’ve Never been Late on a Payment?

These days, no single question comes up more frequently than this. An “underwater” home is one where the outstanding mortgage debt exceeds the appraised value of the real estate. Being underwater is a common situation 4 years into the mortgage meltdown. On average, the cities of Las Vegas and Orlando are underwater.

An announcement is expected today about a revamped refinancing plan that would open mortgage refinancing access to an estimated 3 to 4 million underwater homeowners.

As the Great Recession wages on, rates have hit historical lows. But the refinance party has been an exclusive one; a huge segment of American homeowners are unqualified to re-borrow the debt they already have because of the loss in value of their homes – even when doing so would bring tremendous savings, thus putting them in a safer, more affordable situation. It’s quite a common trap.

There have several stimulus package programs aimed at helping struggling homeowners over the past 4 years. Too many to keep track of. Actually, I take that back. At Propublica, they have been keeping track of not only the various programs, but also the impact each has had. This list is all Obama-era, and lest you think I’m subtly criticizing the our fearless leader here, there were failed efforts under Bush as well, such as: Hope For Homeowners.

Home Affordable Refinance Plan 2.0?

Of all the plans enacted thus far, Home Affordable Refinance Plan (HARP) has been the most impactful. The HARP program reached in to the underwater sector making any borrower who has a Freddie Mac or Fannie Mae insured loan eligible up to 125% of their home’s value.

In their model, underwater homeowners could benefit from a program that opens access to refinancing for borrowers who are current on their mortgages, but unable to access current rates due to equity or income qualification hurdles.

HARP was estimated to open up refinancing options for 3 to 4 million homeowners. Since it emerged in early 2009, a little more than 800k people have successfully refinanced under HARP. The plan has largely been considered a disappointment, but it has penetrated the distressed homeowner market further than any other plan. In recent weeks, speculation has been building about a renewed effort with HARP that would address some of the reasons why it has not been more effective.

Likely HARP Plan Tweaks

A recent study from the Congressional Budget Office speculated about the costs and benefits of revising HARP. The revamped plan is expected to carry some or all of the following adjustments:

remove the Loan-to-Value caps (presently at 125%)
reduce if not remove the loan pricing adjustments that currently make high LTV HARP loans carry a substantial rate premium relative to the broader market
soften or eliminate income underwriting guidelines
eliminate appraisals
allow repeat HARP transactions, as opposed to one-time access

The basis for eligibility gets reduced to:

Freddie Mac or Fannie Mae insured loan
Current on payments

At this point, if you’re deep underwater, and still making the payments, have you not essentially made the case that A) you have the ability to pay your mortgage and B) you are willing to pay your mortgage?

The tenets of mortgage underwriting are all based on evaluating willingness and ability to repay the debt. How much more simple could it be? Plus, if underwarter homeowners were able to access rates in the low 4% range, it stands to reason they’d be much less inclined to let go of that home. When you’re stuck at 6.5% or you have a rate that is adjusting and you fear the future increases, then you have the makings of a strategic defaulter.

Allowing refinancing based on payment history is an extreme concept in this underwriting environment, but it is a back door solution to address a massive amount of negative momentum that continues to poison the housing market. If it works.

There are still several reasons why it may continue to be a headline that sounds a lot better than the story itself. This plan will be full of criticism, critique, and cries. There are unintended side-effects in the making. The philosophical debate between proponents of free markets and of government intervention will be full of sparks. And with an election season approaching, the political pandering and soapbox superhero nonsense will be enough to make my skin crawl.

But, if this program unlocks refinancing for the millions of homeowners who have been boxed out of the market for the past few years, there will be widespread stimulus in the form of $100, $200, $300, even $500 per month in savings. It will be well worth paying attention to.

What do I do Next?

I can help you find out if your loan is backed by Fannie Mae or Freddie Mac. Contact me if you’d like me to check into it for you, and to help you figure out if the new HARP program will be able to help.