Realty Check

Published: Wednesday, 1 Jul 2009 | 3:37 PM ET

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Folks at the Department of Housing and Urban Development alerted me earlier today to an announcement by HUD Secretary Shaun Donovan that the Fannie and Freddie refi plan, you know the one that lets you refi even if you have negative 5 percent equity in your home, would now be expanded to negative 25 percent equity. That's right, your loan can be a full 25 percent more than the current value of your home, and Fannie and Freddie will gladly buy and/or back your new refi.

CNBC.com Freddie Mac

"The President's Making Home Affordable plan is already helping far more families than any previous foreclosure initiative, and with today's announcement we will extend its reach still further," said Donovan at a news conference in Las Vegas with Senate Majority Leader Harry Reid, D-NV.

Of course you're probably expecting old risk-averse me to get on my soap box about how the government is getting on the hook for America's misuse of its home equity, or dare I say, negligence with its home equity (and by America I mean homeowners, banks, lenders, mortgage brokers, investors, probably my kids' fish if you want to be comprehensive). But I already went there when we first learned of the plan and the 105 percent LTV eligibility.

Honestly I'm more concerned about the message this move sends. Secretary Donovan, in an interview in early May, told me that the refi plan was phenomenal (not his word, just his exuberance). He was right at the time. Refis were surging to 80 percent of all new loan applications, mortgage rates were below 5 percent, and spring was showing a few signs of life in home sales. Well mortgage rates are up again, refi applications are now at 46 percent of all applications, and new appraisal rules are making it even harder to get financing. Last week I asked the Treasury's Asst. Secretary for Financial Institutions, Michael Barr, the architect of the housing bailout, if the refi plan still worked with rates at 5.5 percent. He claimed it definitely did, and contended that there were still plenty of borrowers who would benefit. Now, granted, I wasn't asking about the LTV eligibility, but he seemed to indicate that the refi part of the bailout was still going well.

Fannie Mae and Freddie Mac

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Now it's different. Now the bailout is getting bigger, even as so many are claiming that the housing market has turned around (I'm not one of those claiming that). Government officials must believe that home prices are going to go still lower if they are opening up the plan to borrowers with so little equity. Yes, it puts the taxpayers (remember, we now own, sort of, Fannie and Freddie) at more risk, but in doing so it says that the risk of NOT doing it is worse. That's what's bothering me.

• Click Here for a Slideshow of U.S. Cities With The Most Underwater Mortgages

The refi program is supposed to be for borrowers who are in danger of default, not in default already. By opening the plan to a wider swath, officials must be concerned that more people are getting ready to walk away from their negative equity. Barr insisted in our interview that so-called "jingle mail," or those who walk away from their homes, is a very very small problem, but someone at Freddie told me a while ago that one of the biggest problems they have in modifying borrowers in default is that they're no longer anywhere to be found. They're gone.

Today's move clearly tries to give borrowers more incentive to stick it out, even though they're paying for something they don't have and will perhaps never have. That bothers me too.

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