More Fannie and Freddie Borrowers Refinancing Underwater Mortgages

By Liz Clinger Updated on 7/17/2012

The Federal Housing Finance Agency recently reported more than a two-fold increase in the percentage of Fannie Mae and Freddie Mac borrowers who owe more on their mortgage than their house is worth and are choosing to refinance into shorter-term loans.

With the goal of helping homeowners rebuild their equity faster, approximately 19% of borrowers who are more than 5% underwater have opted for much shorter 15- and 20-year terms offered under the Home Affordable Refinance Program.

By moving from a 6% or 7% loan to a current mortgage rate, borrowers are able to keep their monthly payment the same, but pay off more to the principal. As mortgage loans seemed to be reaching new lows every week, most underwater homeowners are able to stay up to date on their payments.

At an online Google Hangout meeting attended by homeowners and held by Department of Housing and Urban Development Secretary Shaun Donovan, there were numerous bills that could maybe bring more refinancing options to underwater borrowers.  For instance, a bill from Senator Jeff Merkley, D-Ore., would permit homeowners to refinance their loans into even shorter-term limits and Fannie and Freddie would cover any closing costs.

Last year, the FHFA made a lot of changes in order to boost their program.  For example, many limitations on loan-to-value ratios and repurchasing risks on the original file have been removed. Also, many appraisal requirements and other upfront fees have been wavered.

During the first quarter, HARP rose dramatically when 180,000 Fannie Mae and Freddie Mac homeowners were offered to refinance their homes under the program. Just in March, close to 80,000 borrowers have opted for the HARP program.
May reported the highest percentage for HARP since it’s inception, reporting 20% of all refinancing activity.

An additional 117,000 borrowers refinanced with HARP in April and May, according to FHFA, and June number are not yet available. Of those, close to 30,000 had LTVs between 105% and 125%, the original ceiling on HARP.

Approximately 6,000 homeowners signed with HARP with an LTV score greater than 125% in April and May.

Some servicers are starting to slow HARP refinancing, according to Barclays Capital analysts to the latest data in July, though Bank of America continues to expand production as the largest GSE service provider.

While on the decline, more than 11 million borrowers are underwater on their mortgage. Fannie Mae and Freddie Mac still own more than 4 million hold loans.

According to FHFA Acting Director Edward De Marco, recent numbers demonstrated that HARP 2.0 is accomplishing it’s objectives; giving homeowners the opportunity to refinance who might otherwise be unable to because of house price declines. Also, Homeowners who have Fannie and Freddie backed loans who remain up to date in their underwater mortgages are opting for the opportunities offered by HARP.