The Obama administration is considering extending its aid to home borrowers beyond those with government-backed mortgages.
This would free up cash for borrowers and stimulate the economy. One of the proposals being considered could also increase loan quality risk for mortgages backed by Fannie Mae and Freddie Mac.
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The segment of homes now worth less than their purchase prices is about 22%. The two government agencies insure about one half of all mortgages.
Most home-owners with underwater values can refinance as long as their existing loan payments are current.
Some loans outside the two agencies were originated by sub-prime lenders. If the refinance program is extended to loans held by private lenders or investors, it could increase the likelihood of default.
The refinancings would transfer billions of dollars of these mortgages to Fannie Mae and Freddie Mac.
The agencies would be allowed to charge higher interest rates in return for the additional risk taken on the sub-prime loans.
Industry experts say the program would require immunity for banks to be successful. It would also need the backing of the Federal Housing Finance Agency (FHFA).
The Congressional Budget Office (CBO) has calculated that the program could save homeowners about $2600 annually. Some of the private loans are adjustable rate loans so the program would not benefit them.
The CBO says that overall, the risk would be spread
wide enough to reduce the number of foreclosures despite the small amount of loans that might default.