Homeowners taking part in the Obama administration's housing rescue program through Fannie Mae and Freddie Mac will now be eligible even if their loan-to-value ratio is up to 125 percent. That means they can have up to 25 percent negative equity and still get a refinance.
The rule changes, part of the government's attempts to restore housing affordability and stem the foreclosure crisis, apply to loans backed up by Fannie Mae and Freddie Mac.
Previously, homeowners could borrow up to 105 percent of their home's value. The new loan-to-value ratio is set up at 125 percent in a further effort to address those mortgage holders who owe more than their homes are worth.
"By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly,'' Treasury Secretary Timothy Geithner said in a statement.
The government earlier this year enacted the Home Affordable Refinance standards in response to the rash of defaults and foreclosures that have occurred as national housing prices have plummeted.
The new LTV rate will be offered only to borrowers who are current on their mortgages that are owned by either Fannie or Freddie.
"This is a change that will put affordable refinancing opportunities within reach of performing borrowers who have suffered the effects of local home price erosion," Freddie Mac Executive Vice President Don Bisenius said in a statement.
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.
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The new program expands a housing rescue plan first outlined by the Treasury Department in February that was meant to lower the costs of home ownership for borrowers who are making timely payments.
A borrower looking to refinance typically has built a large amount of home equity or offers a lender cash to secure a lower interest rate.
In a separate move, the government is encouraging borrowers to take advantage of a chance to lower their mortgages from 30-year to 25-year in order to save on interest charges.
The government will reduce the processing fee for borrowers who take advantage of the 25-year option.