Foreclosure help will reach more homeowners

WASHINGTON -- The government will allow more distressed borrowers who owe more than their homes are worth to be eligible for refinancing assistance under an Obama administration housing rescue program.

Currently, homeowners who owe 5% more than their homes are worth can refinance mortgages through Fannie Mae and Freddie Mac, part of a two-pronged approach to reduce the rapid-fire pace of foreclosures.

On Wednesday, Housing Secretary Shaun Donovan said the program will be expanded, allowing homeowners who owe 25% more than their homes are worth on the market to get refinancing help through the federal agencies. Owing more on a home than it's worth is referred to as being "underwater."

"It's great. It's good news," says Lawrence Yun, chief economist with the National Association of Realtors. "Many homes are way deeper underwater. This means more people can tap into those lower rates. It will enlarge the number of people who can get help."

But other economists questioned how much of a boost it will give toward staving off foreclosures, which have risen about 18% from May 2008, according to a report last month by RealtyTrac.

Even if more homeowners are eligible for refinancing under the Obama plan, rising interest rates on fixed-rate mortgages are still expected to dampen refinancing activity. For many owners, it no longer makes financial sense to refinance. The average rate on a 30-year fixed loan is 5.42% as of June 25, according to Freddie Mac. That's up from 4.82% on May 21.

"It's a little help, but not a huge deal," says Mark Zandi, an economist with Moody's Economy.com. "We need new fixed rates that are south of 5%. At the current rate, it doesn't make a lot of sense to refinance."

Refinancing activity has already dropped off as rates have risen. The refinancing share of mortgage activity decreased to 46.4% of total applications from 54% the previous week, according to a report Wednesday by the Mortgage Bankers Association. The MBA's refinance index, which measures refinancing activity, is at its lowest since November.