Tossing a Lifeline to Underwater Homeowners

Proposed Federal Program Can Help Private Borrowers Refinance

SOURCE: AP/ Ross D. Franklin

With a little help from the federal government, many families who currently have "underwater" mortgages can instantly lower their mortgage payments by an average of $2,600 a year, decreasing their chance of foreclosure, improving spending power, and giving a boost to our economic recovery.

By John Griffith | May 30, 2012

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Roughly 8 million American homeowners are current on their monthly mortgage payments but “underwater,” meaning they owe more than their home is worth. Our analysis also shows that more than 40 percent of those families are likely unable to refinance to today’s historically low interest rates just because they have private loans that are ineligible for federal support. President Barack Obama has offered a way to help these families, however, if Congress is willing to act.

Lenders and investors are often unwilling to refinance underwater mortgages because borrowers with no home equity are at especially high risk of default. Since taking office, the Obama administration has helped millions of underwater and nearly underwater borrowers with government-backed mortgages refinance through a series of new or recently expanded government programs, namely:

• The Home Affordable Refinance Program, established in 2009 to streamline refinancing of underwater loans owned or guaranteed by the government-controlled mortgage financiers Fannie Mae and Freddie Mac
• The Federal Housing Administration’s Streamlined Refinance Program, established in the 1980s to help FHA-insured borrowers refinance regardless of their equity level
• The Federal Housing Administration’s Short Refinance Program, established in 2010 to help a small number of underwater private-sector mortgages refinance into FHA-insured loans, provided the lender or investor agrees to write off a significant portion of what’s owed

But most borrowers with purely private loans are left to fend for themselves, locking an estimated 3.2 million families in above-market rates (see the graphic below).

These are homeowners worth helping. They’ve proven able and willing to continue making payments despite plummeting home prices, waves of foreclosures, and a persistently weak economy. Today they’re only stuck because their mortgage happens to be owned by someone other than Fannie Mae or Freddie Mac, a fact they have little control over once the loan is finalized. With a little help from the federal government, many of these families can instantly lower their mortgage payments by an average of $2,600 a year, decreasing their chance of foreclosure, improving spending power, and giving a boost to our economic recovery.

To be sure, some of these private borrowers may soon be eligible for relief without a new government program. A recent settlement between the nation’s largest banks and 49 state attorneys general set aside $3 billion for refinancing underwater mortgages owned by JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Ally Financial. But these funds only make a dent in the overall problem.

It’s time for Congress to step up. President Obama earlier this month offered one possible solution: a new program within the Federal Housing Administration to help certain underwater borrowers with private mortgages refinance into new government-insured loans. The proposed legislation is a helpful jumping-off point for debate, and we urge lawmakers to do all they can to throw these families a much-needed lifeline.

John Griffith is a Policy Analyst with the Housing team at the Center for American Progress.