Fannie, Freddie ease terms for mortgage refinance

WASHINGTON (Reuters) - The Obama administration on Wednesday expanded its foreclosure prevention efforts to help a greater number of underwater homeowners refinance their mortgages.

The headquarters of mortgage lender Fannie Mae is shown in Washington September 8, 2008. REUTERS/Jason Reed

Under the widened program, mortgage finance companies Fannie Mae FNM.N and Freddie Mac FRE.N will refinance up to 125 percent of a home's value, lifting the current 105 percent loan-to-value cap.

“By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,” Treasury Secretary Timothy Geithner said in a statement.

The collapse in housing prices has caused more and more homeowners to be “underwater,” with the money they owe on their mortgage outstripping the value of their home.

Home values in many markets have sunk by 18 percent in the last 12 months, according to Standard & Poor’s/Case Shiller home price index. The decline in prices has pushed an increasing number of homeowners underwater.

The revamped refinance program expands a housing rescue plan first outlined by the Treasury Department in February that was meant to lower the costs of homeownership for borrowers who are making timely payments.

Before a five-year housing boom ended in 2006, Fannie Mae and Freddie Mac would finance no more than 80 percent of a home’s value. Since the companies were effectively nationalized in September, officials have pushed the firms to cover mortgages with higher loan-to-value ratios.

Rates on 30-year mortgages lingered at record-lows in April and May as the Federal Reserve started to fulfill its promise to buy $1.45 trillion in mortgage-related debt.

However, those rates began to climb as investors began to sense the U.S. economy recession was easing and demand for loan refinancings has tumbled. The higher loan-to-value terms might bring some back to the table, though.

“There will be a lot of people who tried to refinance who couldn’t that now will come back,” said Bob Moulton, president of Americana Home Mortgage Group in Manhasset, New York.

In a typical mortgage refinancing, a borrower has built a large amount of home equity or offers a lender cash to secure a lower interest rate.

In a related move announced on Wednesday, Fannie Mae and Freddie Mac will encourage borrowers to drop their 30-year loan in favor of a mortgage that matures faster. The two companies will reduce the processing fee for borrowers who opt for a 25-year mortgage, for instance.

“The reduction is intended to incent borrowers to select shorter terms and build positive equity in their homes sooner than with a typical 30-year mortgage,” Fannie Mae said in a statement.

Reporting by Patrick Rucker with Lynn Adler and Al Yoon in New York; Editing by Diane Craft