President's plan would help 'underwater' borrowers

The foreclosure crisis met the campaign trail this week in Nevada, with President Barack Obama and Republican candidates for president suggesting sharply different approaches to help address the nation’s continuing housing crisis.

President Barack Obama speaks at a campaign event in San Francisco. Susan Walsh/AP

Obama’s new housing initiative , announced Monday in Las Vegas, may not be as bold as some had hoped, but it offers some underwater homeowners the possibility of relief. A week earlier at the Venetian casino, the leading Republican candidates said that the government should get out of the way and let the market sort out the foreclosure mess. 

The president’s plan will loosen restrictions on the Home Affordability Refinance Program (HARP), which was created especially for homeowners who owe more on their mortgage than their homes are worth. 

HARP allows borrowers with loans owned or insured by Fannie Mae or Freddie Mac to apply for an interest rate reduction. 

While the plan to expand HARP is not a "magic bullet," it would help some financially fragile homeowners avoid foreclosure," said Kathleen Day, a spokeswoman at the Center for Responsible Lending. "It takes them a few steps back from the cliff." 

The program was designed in 2009 to help as many as 5 million underwater homeowners refinance at a lower rate. But as of August 31, it had helped just 894,000 homeowners. One in four homeowners with a mortgage — as many as 11 million — owe more than their homes are worth. 

Still, HARP has clearly helped some. Borrowers who refinanced through the program in the first half of 2010 saved on average $125 to $150 each month according to Freddie Mac. 

The Republican candidates for president said at a debate in Las Vegas last week that the solution to the housing crisis was to grow the economy and let the free market fix the foreclosure crisis. 

HARP's previous provisions barred homeowners who owed more than 125 percent of the value of their homes from participation. In Nevada, two thirds of all loans backed by Fannie Mae are underwater, and half of all loans are above the 125 percent loan-to-value ratio, according to theWall Street Journal .

Under the new rules, HARP will be expanded to include all borrowers, regardless of the value of their home, according to the Federal Housing Finance Agency, the agency that administers the mortgage giants. 

Under the program, a homeowner with a $200,000, 30-year loan who reduces his or her interest rate from 6.5 percent to 4.5 percent would go from paying $1,264 per month to paying to $1,013 per month and be above water in 10 years. 

To get above water more quickly, the FHFA suggests shortening the repayment term to 20 years. With an interest rate of 4.25 percent, the borrower would still pay slightly less at $1,238 and be above water in 5½ years.  

These scenarios, however, don't factor in closing costs, which can make a refinancing much less appealing. 

A more radical approach would be to force banks to lower the principal, possibly with government support, a solution that has gained little traction. 

To qualify for the expanded HARP program, the home must have been sold to Freddie Mac or Fannie Mae on or before May 31, 2009. The borrower must be current on the mortgage with no late payment in the past six months and have had no more than one late payment in the past 12 months. Borrowers with more than 20 percent equity in their homes are ineligible.