Though the final operational guidelines of the Obama administration's foreclosure-avoidance programs won't be released until Wednesday, key details have begun surfacing on the refinancing opportunities that will be available to an estimated 4 million to 5 million homeowners whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac.
Under the Obama plan, borrowers who have made their monthly payments on time but are saddled with interest rates well above current prevailing levels in the low 5 percent range may be eligible to refinance - despite decreases in their property values.
Neither Fannie Mae nor Freddie Mac typically can refinance mortgages where the loan-to-value (LTV) ratio exceeds 80 percent without credit insurance. That insurance can be difficult or impossible to obtain in many parts of the country that insurers have labeled "declining" markets - those that have high risks of further deterioration in values.
Using an example supplied by the White House, say you bought a house for $475,000 in 2006 with a $350,000 mortgage at 6.5 percent that was acquired by Fannie Mae. In three years, the market value of the house has dropped to $400,000, and you've paid down the principal to $337,460.
If you applied for a refinancing to take advantage of today's 5 percent rates - which would save you several hundred dollars a month in payments - you'd have difficulty because your LTV, currently at 84 percent, exceeds Fannie's 80 percent ceiling.
But under the Obama refinance plan, Fannie would essentially waive that rule - even for LTVs as high as 105 percent. In this example, you'd be able to qualify for a refinancing of about $344,000 - your present balance plus closing costs and fees - at a rate just above 5 percent.
In a letter to private mortgage insurers dated Feb. 20, Fannie and Freddie's top regulator confirmed that there would be no requirement for refinancers to buy new mortgage insurance, even if they exceed the 80 percent LTV threshold.
James B. Lockhart III, director of the Federal Housing Finance Agency, spelled out several key restrictions on those refinancings:
* No "cash outs" permitted. This means the new loan balance can only total the previous balance, plus settlement costs, insurance, property taxes and association fees.
* Loans that already had mortgage insurance will likely continue to have coverage under the existing amounts and terms, thereby limiting Fannie and Freddie's exposure to loss. But loans where borrowers originally made down payments of 20 percent or higher will not require new insurance for the refinance.
* The cutoff date for the entire program is June 10, 2010.