Earlier this year, the Obama administration enthusiastically announced the Making Home Affordable program which was supposed to reduce foreclosures through refinancing and loan modifications held by borrowers in trouble. According to a report released by the Washington Post on Saturday, the refinancing part of the program has failed miserably.
At present, less than 3 percent of homeowners with little, no, or negative equity have refinanced their loans under this program. The program targets homeowners whose mortgage loans are underwater, which raises the likelihood of foreclosure at a later date. The program relaxes the equity requirement for refinancings on Freddie Mac and Fannie Mae mortgage loans.
According to the report, only 130,000 homeowners have participated in the refinancing portion of the program. When the Obama administration announced this program in March, it estimated that up to 5 million homeowners were potentially eligible for refinancings. So far the program has achieved a paltry 3 percent share of the total eligible homeowners.
There are reasons why homeowners with underwater mortgages have not yet participated in the Making Home Affordable program. Some homeowners do not want to pay or cannot afford to pay, the closing costs associated with the transaction. Others avoid a refinancing transaction because they would still be making monthly payments on a mortgage loan whose principal balance is still more than the value of their home. These homeowners have no desire to put more money (via closing costs) into an underwater home where it would take many years to regain all of their lost equity.
With the program getting off to a slow start earlier this year, the Treasury Department responded by raising the amount of negative equity permitted in an eligible home to a maximum of 25 percent from a maximum of 5 percent negative equity. So far this substantial change in eligibility requirements has not picked up refinancing activity.
Looking forward, future participation in the refinancing program is likely to remain weak over the next year. Foreclosure filings are expected to increase due to planned rate resets on option ARM and interest only mortgage loans. Mounting foreclosures exert upward pressure on home inventories, which in turn, exert downward pressure on home values. Falling home prices are likely to increase the number of homeowners that are holding underwater mortgage loans.