The Obama administration announced Wednesday that it is expanding its Home Affordable Refinance Program to allow a larger pool of underwater homeowners refinance their mortgages at lower interest rates.
The eligibility criteria for the program has been upped to 125 percent loan-to-value (LTV) ratio, meaning a homeowner who owes up to 25 percent more on their mortgage than their home is now worth can apply for a government refinance.
Officials said the administration decided to widen the loan margin after statistics showed the program wasn’t reaching enough of the homeowners it was designed to help – those who have lost substantial equity as the housing crisis has hammered property values.
The initial guidelines announced in February limited the program to homeowners who owed no more than 5 percent above the property’s current value. For example, if the home was worth $200,000, the borrower could owe no more than $210,000 to qualify for refinancing. But with the expanded criteria, now that same homeowner could owe as much as $250,000 on the home and still be eligible for the government program.
The program also provides borrowers with an incentive to reduce the term of their loan from 30 years to a shorter-term, fixed-rate mortgage so that they can pay down the principal more quickly and reduce lifetime interest payments. Borrowers who refinance may see lower monthly payments and a more sustainable mortgage, which will reduce the risk of default.

However, some analysts say the program still won’t help most of the homeowners who need it most, particularly because it applies only to mortgages that are owned or guaranteed by Fannie Mae and Freddie Mac. The Sun Belt states of Nevada, California, Arizona, and Florida have the largest number of delinquencies and foreclosures, and the steepest drops in property values. But critics argue that most of the problem loans in these states weren’t bought by Fannie and Freddie, instead they were sold to private investors in the secondary market. And the administration’s refinance program doesn’t cover these private label mortgages.
According to James Lockhart, director of the GSEs’ regulator, the Federal Housing Finance Agency (FHFA), the higher LTV refinancings will still allow more homeowners to strengthen their finances by taking advantage of lower mortgage rates. “The enterprises are also incenting these borrowers to combine a lower mortgage rate with a faster amortization schedule, which will enable them to get ‘above water’ on their mortgages more quickly,” Lockhart said.
Lockhart joined HUD Secretary Shaun Donovan and Treasury Secretary Timothy Geithner, along with local legislators, to make the announcement of the program changes in Las Vegas, an area Donovan called “ground zero of the foreclosure crisis.”
Donovan also announced his plans to deploy HUD Foreclosure Rapid Response Teams to assess the areas hardest hit by foreclosure, starting with Las Vegas. The Las Vegas team will consist of two senior-level HUD field staff with experience in both single-family housing and community outreach.
Over the next two weeks, team will be tasked with determining the surrounding area’s housing needs, based on delinquency rate data at the zip code level. The HUD representatives will also organize meetings with local stakeholders, such as housing counseling agencies, lenders, and members of the public. Based on the Foreclosure Rapid Response Team’s assessment, Donovan said HUD will commit two full-time employees to implement their recommendations.