One option under the most recent refinancing plan from the Obama administration would allow borrowers to not only surface from underwater but actually begin building equity in their home at a quicker pace.
The plan, still considered a long shot to move anywhere in a gridlocked Congress, allows borrowers in privately funded loans to refinance into a lower rate Federal Housing Administration mortgage. The program would be expected to cost between $5 billion and $10 billion through a tax charged on the banks.
A separate option under the program would apply to borrowers in Fannie Mae and Freddie Mac loans as well. Anyone who refinances could reduce the term of their mortgage to less than 20 years. If the borrower commits to keeping the monthly payment where it is, the GSEs or the FHA would cover the closing costs estimated at roughly $3,000 per refinance.
The White House fact sheet points to a borrower who took out $214,000 mortgage in 2006 at a 6.5% interest rate and now has a current balance of $200,000 after remaining current on a $1,350 monthly payment. If the house is worth $160,000, the borrower would be at a loan-to-value ratio of 125%.
Under the program, the borrower could qualify to be refinanced into a possible 4.25% interest rate on a new 30-year loan. This would reduce the monthly payment by roughly $370. After five years, the borrower's balance would still only be whittled down to $182,000.
If the borrower elects to keep the mortgage payment where it is at $1,350, he or she could refinance into a 20-year mortgage at today's average interest rate somewhere around 3.75% and have the ability to commit the monthly savings to the principal.
After five years, the mortgage balance would drop to $152,000, bringing the borrower above water on the house worth $162,000 – and possibly sooner should home values improve over that same amount of time.
Laurie Goodman, senior analyst at Amherst Securities, highlighted a caveat that would significantly reduce the borrowers able to refinance into the shorter term.
"What is clear is that this incentive option is less effective for an FHA refinance due to the additional cost of FHA mortgage insurance (which is likely higher than any MI being paid on existing loans)," Goodman said in a note Friday. "Once the MI premium is taken into account a far smaller number of borrowers would be able to refinance into a shorter term mortgage without increasing their total mortgage payment; a payment increase would certainly limit uptake."
She added the program would appeal to more GSE borrowers, who would be able to do this under a streamlined Home Affordable Refinance Program. The Federal Housing Finance Agency expanded the program late last year, but the administration's latest plan also calls on Congress to eliminate appraisal costs and erase even more representation and warranty risk for HARP refinances done with different servicers.
The FHFA could do this without Congress, and would allow more GSE borrowers with origination dates prior to May 2009, to take advantage of the speedy path to rebuilding equity.
"This makes sense, and is a nice touch," Goodman said.