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LIFTING THE HOME LOAN BURDEN

So you want to refinance your house, but it’s not worth enough for you to get a good loan in the current market? A new Obama administration program is designed to fix that problem for millions of homeowners.

Here’s how it works.

In the past, the federal Fannie Mae and Freddie Mac mortgage programs would only handle loans of up to 80% of your home’s value, unless you bought mortgage insurance. And if you owed more than your home was worth, you were flat out of luck.

As of this month, that has changed. Through June 2010, borrowers whose loans are owned or guaranteed by Fannie or Freddie may be able to get quick refinances for up to 105% of a home’s value. They must be current on their mortgage payments, but administration officials estimate that as many as 5 million homeowners qualify.

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And refis are available for borrowers with credit scores as low as 620.

“This is going to create a real opportunity for millions of people to save money on their mortgages -- or replace an adjustable-rate mortgage with a fixed rate,” Freddie Mac spokesman Brad German said.

The impatient can go to https://makinghomeaffordable.gov, a federal website that explains the refi program. For others, here’s a look at some details and issues that are likely to be encountered.

First, the rationale for the program.

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As federal interventions go, encouraging refinancings may not compare with the $182.5 billion bailout of American International Group Inc. But a homeowner with a $500,000 loan can save $476 a month by cutting a 6.5% interest rate on a 30-year mortgage to 5% -- savings that can be plowed back into the economy or can reduce the odds of foreclosure should the downturn deal the borrower a financial blow.

The historically low rates also make this a perfect time to replace a bubble-era adjustable-rate or interest-only loan with a traditional 30-year or 15-year fixed mortgage.

Switching to a fixed rate might mean higher payments initially, because of an artificially low payment on the adjustable mortgage, but guards against even higher payments in the future should rates skyrocket during an inflationary period, German pointed out.

Now, some caveats about the new refi program:

For starters, it’s only for folks with solid payment histories. You’re allowed to have been 30 days late on a single monthly mortgage payment once during the past year, but no more than one, and no 60- or 90-day late payments. (A separate Obama administration program encouraging loan modifications for struggling borrowers is also explained at makinghomeaffordable.gov.)

What’s more, the refinancings only work for mortgages owned or guaranteed by Fannie Mae or Freddie Mac. Still, about 40% of all U.S. home loans are Fannie or Freddie loans, Faith said, so millions will be covered.

Borrowers who owe less than 80% of their homes’ values are not eligible. They have the opportunity to turn to standard refinancings, a currently white-hot market that, as Kathy M. Kristof reports in an accompanying story, can require jumping through a host of financial hoops these days.

There are financial limits to the largesse, though. The maximum Fannie or Freddie loan is $729,750 in Los Angeles, Orange, Ventura and Santa Barbara counties, $697,500 in San Diego County, and $500,000 in Riverside and San Bernardino counties. Larger “jumbo” mortgages carry a heavy premium.

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The erosion of home prices in former boom regions such as California is also a factor because a lot of people owe more than 105% of what their home is worth.

Finally, although the government-sponsored Fannie and Freddie refinancings are designed to encourage lenders to make new loans, the program is entirely voluntary. On its informational website, the government tells borrowers to exercise patience because lenders and servicers are just starting to implement the program, “and there may be a slight delay before they are prepared to process all applications.”

If you think you’re eligible and want to check, an initial screening test is available at the government website, including directions on how borrowers can determine if their loan is owned or guaranteed by Fannie or Freddie.

For Fannie Mae, call (800) 7FANNIE, or use an automated query system at www.fannie mae.com/loanlookup. For Freddie Mac, the number is (800) FREDDIE and the website is www.freddiemac.com/mymortgage.

Additional tips:

Start the process

Borrowers should first talk to their mortgage servicer, which is the loan company that sends the bills and collects the payments. The phone number should appear on the bill.

Freddie Mac requires borrowers to refinance through their current servicer, while Fannie Mae allows borrowers to shop at other Fannie-approved servicers to try to get a better rate. However, a servicer that already is handling a loan may have the best shot at providing the cheapest and fastest refinancing, since the borrower’s loan files are on hand.

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Getting ready

Although the loans are supposed to involve minimal new checks for qualified borrowers, it’s always good to collect paperwork beforehand. This would include information about your current mortgage, such as your monthly statement; recent pay stubs, income tax forms or other documentation of your household income; details about any second mortgage or home equity line of credit on the house; and account balances and minimum monthly payments on your credit cards, student loans, car loans and other debts.

Loan types

Most of the refinanced mortgages will have fixed rates with terms of 15 years or 30 years, although some may extend to 40 years. Some borrowers with adjustable-rate mortgages may qualify for new adjustable loans with initial fixed rate periods of at least five years. There are no prepayment penalties or balloon payments.

Mortgage insurance

It’s not required on the new loans, but if you had it on your old loan, you’ll have to keep it.

Fees

The new loans should be low cost. Lenders should not have to do much checking on candidates because they are by definition solid borrowers with credit histories already on file. As usual, expect some trade-offs, with lower fees available if a borrower accepts a higher interest rate, said Brad Blackwell, Wells Fargo’s executive vice president of national retail mortgage sales.

Freddie Mac has capped the amount of fees and points that borrowers can wrap into the new loan at $2,500, spokesman German said.

At Fannie Mae, there is no cap on the amount of fees and points that can be financed as part of the loan.

Fees that are included in the amount financed count toward the 105% loan limit.

Appraisals

Fannie Mae and Freddie Mac have approved computerized appraisal systems that can be used to speed the refinance process, although lenders can elect to have the properties appraised the old-fashioned way, with humans paying a visit to the home.

Second mortgages

Borrowers with second mortgages or home equity lines of credit can participate, but they can’t consolidate the two loans into a single new mortgage. That can mean tricky negotiations because the second-mortgage lender must agree to stay in second position for repayment.

Second homes

There are no limits on how many mortgages a borrower can refinance, assuming that the loans meet the program criteria.

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scott.reckard@latimes.com


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