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The Obama administration recently announced that borrowers with little or no equity in their homes will have yet another year to take advantage of a refinancing program that so far has made little progress.
The initiative, known as Home Affordable Refinance Program (HARP), was set to expire in June. But, so far, it has reached fewer than 200,000 of the up to 5 million borrowers federal regulators hoped it would help.
The program is aimed at the millions of borrowers whose home equity has been diminished by falling home prices, or who owe more than their homes are worth, making it impossible for them to take advantage of historically low mortgage rates. Originally the program targeted borrowers whose loan balances were slightly higher than their property's value. The program was later expanded to include borrowers who owe up to 25 percent more than their homes are worth.
These underwater borrowers are at greater risk of foreclosure, and the administration hoped that lowering their payments would decrease their chances of falling behind.
But the program ran into several problems. Many borrowers were too underwater to qualify and the program was limited to loans backed by Fannie Mae or Freddie Mac, the mortgage financing companies. The initiative was also dogged by delays as lenders struggled to update their computer systems to accommodate the program. Another obstacle was that many homeowners have second mortgages or private mortgage insurance, which can get in the way of refinancing a primary loan.
And for some borrowers, the costs associated with refinancing, such as closing costs, were not worth the lower interest rates, especially for homeowners worried they might lose their jobs or might hit another financial crunch later.
The housing market is still very unstable. One month we read that home sales are strong and home prices are rising. The next month we see that sales are down. One piece of discouraging news that came out recently was that in the fourth quarter of 2009 another 600,000 homeowners found themselves "underwater" or owing more on their mortgages than their homes were worth. In fact, the total number of households in this situation is now over 11 million people or 24 percent of all properties that carry a mortgage. This information, reported by First American Core Logic, a real estate research firm, tells us that many people are still really struggling.
The first choice for many homeowners in this situation is to try to restructure their existing mortgages. However, this can be a very long and painstaking process and many people find they do not qualify. As a result, more and more people are thinking about walking away from their existing homes and mortgages.
Aside from the moral considerations, which are great, what are the points you need to consider before you think about walking away from a mortgage? First, you need to understand this is a huge decision. It might seem like this option would solve a lot of your problems, but in reality, it generally just adds more. Probably the biggest impact is - you will not be able to get a new mortgage for quite some time — five years being typical. That means you need to prepare to be a renter for at least that amount of time.
Plus, your credit score and credit record will be adversely impacted for about seven years. During that time, your ability to get any other kind of loan will be negatively impacted. Car loans, assuming you can get them, will be at very high interest rates. Same for any other type of consumer loan. Finally, there may be adverse tax implications as well.
So, walking away is certainly not without its costs. If your financial life is going to be impacted for five to seven years anyway, it just might make more sense to hang in there and keep making the mortgage payments. No one can accurately predict what the real estate market might look in 2015 — perhaps by then your situation could be dramatically different.
Simple tips to help you save on the cost of food.
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