'Underwater Mortgage' Refis Get Fresh Push in Congress
CNBC Real Estate Reporter
A slight improvement in home prices has helped to pull some U.S. homeowners back above water on their mortgages, but the gains are small, and the problem is still epidemic.
As of July, 22.4 percent of homeowners with a mortgage owed more than their home was worth, according to a new report from Lender Processing Services. (Read More: Home Prices Are Not Rebounding as Fast as You Think.)
The numbers go higher, as the loans get more troubled. Of non-current mortgages, 57.6 percent are underwater, and of loans in foreclosure, 68.3 percent.
Being underwater on your mortgage does not necessarily mean that you can’t afford to pay that mortgage. In fact, 18 percent of loans that are current are underwater, according to LPS, with the depths ranging from just 0.4 percent in Wyoming to a whopping 55 percent of Nevada homeowners owing more than their home is worth. Unfortunately, negative equity does breed delinquency. (Read More: 'Underwater' Mortgages Decline, but Housing Is Still Hurting.)
"As negative equity increases, we see corresponding increases in the number of new problem loans," said Herb Blecher of LPS Applied Analytics. “In Nevada and Florida, two of the states with the highest percentage of underwater borrowers, more than three percent of borrowers who were up to date on their payments are 60 or more days delinquent six months later. This suggests that further home price declines — should they occur — could jeopardize recent improvements."
The Obama administration has focused its latest housing efforts on refinancing, pushing expansions to its existing Home Affordable Refinance Program (HARP), which allows borrowers with loans backed by Fannie Mae and Freddie Mac to refinance to lower rates even if they are deep underwater. (Read More: 'Wind Down' of Fannie, Freddie: 'Positive for Housing'? )
More than 519,000 loans have been refinance under HARP since the beginning of this year, more than all of the HARP refinances done in 2011. The key was a change this year that took away any limits as to how far underwater the borrower could be.
The expansions are in a billsponsored by Senate Democrats Barbara Boxer, D-Calif., and Robert Menendez, D-N.J., which has seen little action of late but was “reintroduced” Monday. The original bill would protect banks against so-called “put-backs” on the refinances. That’s when Fannie and Freddie require the lender to buy back a defaulted loan. Currently lenders are only protected on these refis when they are already the ones servicing the loans, so this would make it so that borrowers don’t necessarily have to refinance with their existing lender.
The new lender would be protected from put-backs as well. Borrowers complain that when they refinance with their current lender, they are not getting the best rate because some banks have too much demand. The bill would also remove appraisal and up-front fees for borrowers. (Read More: Why Millions of Americans Still Can't Refinance Their Mortgage.)
“This bill is a win-win-win: homeowners will have more money in their pockets, Fannie and Freddie will see fewer foreclosures, and the housing market and economy will be strengthened. That’s why the Menendez-Boxer bill has such broad support from industry and consumer groups,” said Senator Boxer in a release.
The mortgage industry has secured changes to the bill, including keeping the current June 1, 2009 cut-off date for HARP refinances. The bill had had a provision that put the cut-off date at June, 2010. Other compromises drop penalties against mortgage insurers and second lien holders. There had been discussion of a more complicated compromise designed to get Republicans on board.
“We believe there is talk of including a Qualified Mortgage safe harbor in the Boxer-Menendez HARP expansion bill in order to pick up enough GOP support to get the measure enacted,” wrote Jaret Seiberg of Guggenheim Partners. “The safe harbor could require the Consumer Financial Protection Bureau (CFPB) to define mortgages that based on their underwriting terms are deemed to meet the ability to repay requirement in Dodd-Frank (learn more). That there is talk of a QM safe harbor shows how much some Democrats want to get this enacted.”
Safe harbor means that a lender would automatically be safe from litigation if they underwrote the loan according to the CFPB’s underwriting terms. This as opposed to having to take the case to court and defend why the loan should not be bought back by the lender. Sen. Menendez said that was in fact not in this current version, which he adds would be endorsed by the White House.
“We have engaged with the White House in its official role because we know this is on one of the president’s to-do lists,” said Menendez on a conference call with reporters.
Industry leaders, however, are already responding to the possibility of more additions to the bill.
"With the revisions that were made and introduced today, we are glad to be able to support the bill to help additional segment of homeowners who had not previously been able to refinance at today's historically low rates,” said David Stevens, president and CEO of the Mortgage Bankers Association. “As it pertains to amendments, we will evaluate each one on its own merits. We have certainly supported a safe harbor for the QM rule, and would continue to support that concept, but we also want to be careful about loading up the bill with amendments that could end up hurting its chances for passage.”
—By CNBC's Diana Olick