Another program to aid in the subprime mortgage crisis has been announced by Fannie Mae.
As with most recent initiatives, whether designed by lenders, Congress, or the President, the intended audience of Fannie's program is limited, but it does target a sector of troubled borrowers that has not received a lot of attention ' the "underwater" borrower.
Being underwater in the current market means owning more on a mortgage than the underlying security ' that would be the house ' is worth. Some borrowers actually took out a loan that was near 100 percent loan to value, others have watched their equity disappear as housing prices plummeted. Were the borrower to sell the house or refinance under today's economic conditions he would have to bring cash to the closing table to make up the difference between the loan or sale proceeds and what is actually needed to retire the old debt. (He might be able to convince the existing lender to take a "short payoff" to reduce or eliminate the deficiency but this is a tough sell when the loan is current.)
Fannie Mae's new program would not, as the bill authorized in the House last week does, require existing lenders to write-down mortgages
to a level where refinancing is feasible. Fannie will instead refinance new loans adequate to cover the old debt. This does not bail out the borrowers boat ' he is still underwater ' but might result in a lower payment because of a reduced interest rate, a fixed rate, or a slightly extended amortization period.
Under the new rules Fannie will refinance mortgages at up to 120 percent loan to value and the program appears to be limited to loans that are paid to date and that Fannie either owns or insures.
Fannie estimates that 150,000 homeowners could be helped by such a program.
The thrust of the program is obviously to buy time. Fannie is betting that, by refinancing homeowners, it will assist them in keeping payments current and that in the long-term house prices will improve to a point that these loans will become adequately collateralized. Critics are already saying that this is also a way of pushing losses into the future so as not to impact Fannie's fragile bottom line or capital reserves; that if prices continue to deteriorate more homeowners, lacking equity, will simply walk away.
Still, this new program will provide a place where as many as 150,000 people can hope to find help. Stack enough of these limited-focus programs together, wherever they come from, and the universe of battered borrowers may all find a place for hope.