The adjustment is part of the Home Affordable Refinance Program, introduced by the Obama Administration to help homeowners avoid foreclosures. Some 1.5 million to 2 million homeowners have signed up, according to initial estimates, but a Mortgage Bankers Association release said that as of June 22, only 13,000 loans had been completed using HARP.
The original HARP rules set a ceiling of 105 percent for loan-to-value, meaning that a borrower living in a home with a market value of $100,000 could borrow $105,000 against it. The new rules allow for a 125 percent LTV: that homeowner can now borrow $125,000. The change is meant to help potential refinancers in areas where home prices have fallen sharply and wiped out the equity buyers had from a down payment.
"Many borrowers in good standing have been shut out from the benefits of refinancing due to significant declines in property values across the country," Michael J. Williams, president and CEO of Fannie Mae, commented. "By broadening the scope of the initiative, more borrowers will experience savings on their monthly mortgage payments and have a better chance of sustaining homeownership over the long term."
Freddie Mac's executive vice president Don Bisenius said in his company's release, "This is a change that will put affordable refinancing opportunities within reach of performing borrowers who have suffered the effects of local home price erosion." Together, Fannie and Freddie own or guarantee more than half of the country's single-family mortgages.
Working to stabilize the housing market may seem like an admirable goal, but whether it's the right thing to do -- or if it's being done in the right way -- is frequently overlooked. Fannie and Freddie have needed $85 billion in government capital to keep afloat, and the Treasury has extended each a credit line for hundreds of billions more since the two organizations were placed in conservatorship in September. There are no signs the political appetite to shovel money at "fixing" the housing markets is coming to an end, either.
It's clear the housing market is undergoing a massive correction, and huge numbers of borrowers will be foreclosed upon barring intervention -- but that is what markets do following periods of excess. In this case, the higher LTV allowance will offer more people the chance to live as subsidized renters with an option to buy their home (a consequence of the tax deduction for mortgage interest). As with bailing out financial companies, debts will linger instead of being liquidated, and the government will let more borrowers piggyback on its borrowing power.
What actual good the government believes it can do after taking into account the costs of action, both explicit and implicit, is unclear; most likely, the cost part of the equation was not weighed to begin with.
The end results, unfortunately, are predictable: another source of stress on the budget deficit, more reasons to let foreign central banks (like China) call the dollar's status into question, and the subsidizing of a favored market that will artificially inflate costs for everyone else.
James Cullen also edits and writes at CollegeAnalysts.com.