New rules would help underwater homeowners refinance

— -- The Obama Administration announced changes Monday to a federal program that could enable almost one million additional homeowners over the next two years to refinance and reduce monthy mortgage payments.

The changes are intended to benefit homeowners who've continued to make mortgage payments , even as home values have sunk, but can't refinance and tap today's low interest rates because they have less than 20% equity in their homes or owe more on homes than they're worth.

The administration says eligible homeowners — who must have a loan owned or backed by Freddie Mac or Fannie Mae— could save about $2,500 a year in house payments, providing a small boost to an ailing economy if that money is spent elsewhere.

"It's the equivalent of a substantial tax cut for these families," says Department of Housing and Urban Development Secretary Shaun Donovan.

The Home Affordable Refinance Program was launched in 2009 by Obama, who said then that it would enable 4 million to 5 million homeowners to refinance. Through August, HARP had only done 894,000 refinances.

HARP has struggled to gain traction because lenders have resisted refinancing borrowers who lack home equity — because they're considered more at risk of default than people who have home equity -- and because Freddie and Fannie tacked fees onto HARP loans to lower their exposure, too. But that made HARP refinancing uneconomical for many borrowers.

The changes announced Monday — the biggest to date for the HARP program — reduces some of that risk for lenders and mortgage insurance companies, officials say. That should encourage more lenders to compete to refinance eligible borrowers, says Edward DeMarco, acting director of the Federal Housing Finance Agency, which oversees Freddie and Fannie.

Freddie and Fannie have also agreed to eliminate some fees on loans that run 20 years or less and lower them on longer term mortgages. The exact cut won't be known for several weeks.

In some cases, borrowers will also no longer need a new appraisal on the home, which should reduce refinance costs.

DeMarco says the changes will not only help borrowers but will also lower risk to Freddie and Fannie because fewer borrowers will eventually default. Freddie and Fannie own or guarantee almost 1 of 2 U.S. home loans and were taken over by the government in 2008 to prevent their collapse.

"We've seen that these borrowers … can make good on their financial obligation," DeMarco says.

While the program's changes will help some, it won't help all. Data and analytics company CoreLogic estimates that 7 million U.S. home-loan borrowers are current on their loans, owe more on their homes than the homes are worth and have interest rates that are about a full percentage point higher than the prevailing advertised rate.

To be eligible for HARP, homeowners must have mortgages that were sold to Fannie or Freddie on or before May 31, 2009. Borrowers must be current on their payments and not have made a late payment in the past six months.

HARP has been extended twice and has been tweaked before to encourage more activity but those changes failed to incite the activity regulators hoped.

Because of the new changes, FHFA says HARP refis may double from current levels. But DeMarco cautions that several factors will affect the uptake .

Of most important factors will be interest rates. They're now averaging about 4.11% for a 30-year-fixed rate loan, a near historic low, the latest Freddie Mac survey shows. If interest rates rise, refinancing becomes less attractive.

There's also risk that lenders — who may already be struggling to keep up with refi volume — will not aggressively pursue underwater borrowers with attractive loan terms, says Mark Zandi, chief economist of Moody's Analytics.

To date, most of the HARP refis have occurred on loans in which homeowners had some equity or owed only slightly more on their mortgage than their home was worth — even though HARP enabled refis for people who owed up to 25% more than their home was worth, FHFA data shows.

Under the new program, there is no limit on how deeply underwater someone can be as long as they refi into a 30-year-fixed rate mortgage.

DeMarco says lender resistance is less likely now than in the past because there's less risk that lenders will be asked by Freddie and Fannie to take back loans that go sour if Freddie and Fannie find that lenders made mistakes when originally making the loan.

Rep. Dennis Cardoza, D-Calif., says HARP has never helped the deeply underwater and that the new changes won't, either.

"This is too little too late," he says.

Zandi says the program could still have a "meaningful" impact, enabling up to 2.85 million refis by the end of 2013.

Contributing: Richard Wolf