Obama Foreclosure Plan to Aid Refinancings
If you haven’t been able to refinance because you lack equity in your home, check out the plan.

Key details have begun surfacing about the extraordinary refinancing deals that President Obama’s foreclosure-prevention plan will offer an estimated 4 million to 5 million U.S. homeowners.

Obama’s plan aims to help borrowers who are current on their loans, but can’t refinance into today’s low rates because these homeowners have little or no equity in tbeir properties.

Homeowners generally need 20 percent equity to refinance into cheaper loans. However, many people bought homes with less than 20 percent down during the housing boom.

Worse, declining property values mean that even those who did make 20 percent down payments often find they no longer meet the 20 percent rule.

Now, you can still refinance in such cases if you pay for private mortgage insurance (PMI). But it’s tough to get PMI these days in some parts of the country. PMI firms are reluctant to write policies “declining” markets large areas that the firms fear could face further home-price declines.

As a result, tens of thousands of Americans are finding that they can’t refinance. Even though mortgage rates are currently running around 5 percent, these homeowners are stuck with 65 percent mortgage rates or worse.

But under Obama’s plan, government-backed mortgage giants Fannie Mae and Freddie Mac will essentially waive the 20 percent rule on any mortgages they back.

In fact, they’ll even allow homeowners to be slightly “under water,” owing more on a home that its current market value.

In a recent letter to PMI firms, the Federal Housing Finance Agency described Obama’s plan as “an avenue for the borrower to reap the benefit of lower mortgage rates in the market.”

However, the letter spelled out several key restrictions to Obama’s program, including:

No “cash-out” refinancings. New loan balancescan’t exceed a home’s previous mortgage balance, except for settlement costs, insurance, property taxes and association fees.

Some PMI. Homeowners who already have PMI will have to continue payingfor coverage. This will protect Fannie and Freddie against some future foreclosure losses.

However, homeowners who’ve never had PMI (because they originally bought their properties with at least 20 percent down) won’t have to get coverage even if their homes’ values have fallen.

Limited window.

Homeowners must refinance by June 10, 2010, to qualify for the program.

FHFA chief James Lock-hart said that although Obama’s program calls for homeowners to refinance into cheaper loans, he expects Fannie and Freddie’s risk of losses to drop.

That’s because lower-cost loans mean fewer homeowners will likely fall into foreclosure.

“Credit risk (will) be reduced, because after the refinance, the borrower (will) have a lower monthly mortgage payment,” he said.

How well the program works could depend on whether Obama’s broader effort to stabilize home prices and the broad economy succeeds.

If large numbers of people who refinance under Obama’s program go into foreclosure anyway, the red ink from his plan might flow like a river.

But since that’s an unknown and the refinance program is a here-and-now reality, homeowners who qualify should “go for it.”

If you haven’t been able to refinance because you don’t have enough equity in your home, check out Obama’s program if you; have been paying your mortgage on time; currently have a loan that’s owned or guaranteed by Fannie or Freddie. (If you don’t know, ask your loan servicer.)