Fannie to Aid Underwater Loans

Real Estate Agent with Fathom Realty DC-VA-MD

Fannie Mae is preparing to introduce by midyear a program of refinancing mortgages for people who owe more than the current value of their homes, a situation known as being "underwater."

The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S. It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal -- something many lenders are reluctant to do. Fannie's refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.

Officials of Fannie, a government-sponsored provider of funding for home loans, said the new program is limited to people who have kept up on their payments so far and whose loans are owned or guaranteed by the company. Normally, it is impossible for underwater borrowers to qualify for refinancing because the collateral isn't worth enough to support new loans that would let them fully pay off the old ones. But Fannie officials say in some cases it can make sense to refinance such people if the new loan will reduce their interest rate or let them lock into a fixed rate rather than risking future upward adjustments.

"We're saying to the consumer, 'You're not trapped any more,'" said Jeff Hayward, a senior vice president at Fannie.

The program will allow refinancing loans of as much as 120% of the property value. Fannie officials project that 150,000 households could qualify for such refinancings.

Rather than reducing the principal due on the loan and taking an immediate loss, Fannie is betting that these people will be able to keep up on their new loans and prices will recover.

The National Association of Home Builders and the National Association of Realtors praised the program, and many politicians have been pushing Fannie and rival Freddie Mac to do more to help borrowers.

The companies want to avoid immediate loan losses that would further erode their meager capital cushions.

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Heather the Realtor Orlando, Lake Mary
LemonTree Realty - Orlando, FL
First Time Home Buyers, Bank Owned Homes

Wow 120% of value not sure if that could be a good thing or a slippy slope for later down the road. Nonetheless something needs to be done for those people trying to keep their homes.

May 12, 2008 02:29 AM #1
Chip Jefferson
Gibbs Realty and Auction Company - Columbia, SC

And all you need to qualify is a 15 year job history and a 800 score. I see fannie and freddie turn no brainers down daily.

May 12, 2008 02:34 AM #2
Jennifer Butz
Not yet determined - Lilburn, GA

Exactly, Laura. This is a good thing to get out, but it's not a good thing because the values are still going to be skewed and what do they do when they sell the property? Sell it for 120% more than what it is worth?

May 12, 2008 02:37 AM #3
Denny Horner
Evers & Co. Real Estate - Washington, DC

Yikes!  This is a slippery slope...maybe not for all markets...but it will have consequences.  I've been dealing with a lot of short sales as well and this seems like it is going to be another barrier for the lenders to use as defense...good for those trying to keep their homes, not so good for those who have to sell...

May 12, 2008 03:32 PM #4
C. Gernert

This is great for people that are already covered by Fannie Mae but what about those of us that are not, have great credit and have kept up our payments but are way underwater?  There is nothing out there.  I've been told by three (3) banks to stop making my payments and then there is help.  Gee thanks for nothing. 

Apr 06, 2009 06:35 AM #5
Heidi Morris

Sounds good and what happens if your in a non-conforming jumbo loan paying 7% and underwater. I believe you have to have a fannie mae loan already. Also if you have any extra income like 100 dollars you don't qualify. So for us theres no help and the help thats there is only to get you into more debt no thanx.

Sep 25, 2010 05:54 AM #6
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Boris Miric

Realtor (Licensed in DC-VA-MD)
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