Rebuilding American Homeownership: Yet Another Government Refinance Program

Another government refinance program has been proposed in Washington by Senator Jeff Merkley. The Rebuilding American Homeownership (RAH) program is for underwater homeowners who do not have their home loans with Fannie Mae or Freddie Mac. This new government refinance program is for responsible homeowners that make their payments on time and cannot receive help under the Home Affordable Refinance Program (HARP 2.0).

Help for Non-Government Backed Underwater Homeowners

If you’re underwater in your existing mortgage and are not backed by Fannie Mae or Freddie Mac this is the program for you. Rumors of HARP 3.0 removing the Fannie/Freddie requirement have yet to happen and this is the first program that could meet the needs of those left out of the HARP 2.0 refinancing party. This is rumored to include those underwater with jumbo mortgage loans. The government estimates there are three million underwater homeowners that have mortgages not backed by Fannie Mae or Freddie Mac.

Proposed Rebuilding American Homeownership Government Refinance Program

The program would create a temporary government backed trust to purchase mortgages from banks and private lenders not backed by Fannie Mae or Freddie Mac. The trust would raise money by selling mortgage backed securities and bonds to investors ensuring ongoing capital for purchasing home loans. The program proposes a 2% spread on refinance rates allowing RAH to operate without taxpayer funding. (2% seems like a lot)

The program is proposed as a short-term measure that would close down after three years when all of the loans were sold. The only requirement would be that you are current on your mortgage payments and not with Fannie Mae or Freddie Mac. The program doesn’t seem to address loan-to-value ratios over 140% because lenders must take a loss on the mortgage, which is not likely to happen.

The Rebuilding American Homeownership program would require mortgage insurance until your balance was paid down to an 80% loan-to-value ratio. Short-sales of homes in the program would not be allowed for four years.

RAH Mortgage Refinance Loans

The program proposes three choices for underwater homeowners. There is a 30-year fixed rate mortgage at 5 percent interest, a 15-year fixed rate mortgage at 4 percent interest and a combo mortgage. The 15-year fixed rate is a better deal but would offer higher payments including mortgage insurance. If you’re able to refinance under RAH you’d be paying higher refinance rates due to the 2 percent markup, which should still be lower than what you’re currently paying.

The third option includes a second mortgage loan for the loan-to-value balance over 95%. This second mortgage would not accrue interest or require payments for the first five years of the loan. This would act as a temporary mortgage reduction with minimal losses for lenders.

Will RAH Underwater Mortgage Refinancing Work?

Usually when a program sounds too good to be true in Washington, it never happens as advertised. Rebuilding American Homeownership seems to benefit underwater homeowners while limiting risk for lenders. A program like this is worthwhile as there are an estimated 3 million homeowners left out of latest version of the Home Affordable Refinance Program (HARP 2.0). It’s unclear how many of these homeowners have given up and walked away from their mortgage loans.

As with any proposed legislation it still has to make it through the House and Senate before being signed into law by the President. Stay tuned for more on the government’s efforts to bail out underwater homeowners.