By Kenneth R. Harney

Saturday, February 28, 2009; F01

Although the final operational guidelines of the Obama administration's foreclosure-avoidance programs won't be released until Wednesday, details have begun surfacing on the extraordinary refinancing opportunities that will be available to an estimated 4 million to 5 million homeowners whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac.

Under the Obama plan, borrowers who have made their monthly payments on time but whose interest rates are well above current prevailing levels in the low 5 percent range may be eligible to refinance -- despite decreases in their property values.

Neither Fannie Mae nor Freddie Mac typically can refinance mortgages where the loan-to-value (LTV) ratio exceeds 80 percent without some form of credit insurance. That insurance can be difficult or impossible to obtain in parts of the country that insurers have labeled declining markets, with high risks of further deterioration in values.

In effect, large numbers of people who bought houses several years ago with 6.5 percent or higher 30-year fixed rates cannot qualify for refinancing because their LTVs exceed Fannie's and Freddie's limits.

Using an example supplied by the White House, say you bought a home for $475,000 in 2006 with a $350,000 mortgage at 6.5 percent that was eventually acquired by Fannie Mae. In the three years after you bought, the market value of the house has dropped to $400,000, and you've paid down the principal to $337,460.

If you applied for refinancing to take advantage of today's 5 percent rates -- which would save you several hundred dollars a month -- you would have difficulty because your LTV, at 84 percent, exceeds Fannie's 80 percent ceiling.

But under the Obama refi plan, Fannie would essentially waive that rule -- even for LTVs as high as 105 percent.

In this example, you would be able to qualify for a refinancing of roughly $344,000 -- your present balance plus closing costs and fees -- at a rate just above 5 percent.

In a letter to private mortgage insurers Feb. 20, Fannie and Freddie's top regulator confirmed that there would be no requirement for refinancers to buy new mortgage insurance, despite exceeding the 80 percent LTV threshold.

James B. Lockhart III, director of the Federal Housing Finance Agency, described the refinancing opportunity as "akin to a loan modification" that creates "an avenue for the borrower to reap the benefit of lower mortgage rates in the market."

Lockhart spelled out several key restrictions on those refinancings:

• No "cash outs" will be permitted. This means the new loan balance can total only the previous balance, plus settlement costs, insurance, property taxes and association fees.
• Loans that had mortgage insurance will likely continue to have coverage under the existing amounts and terms, thereby limiting Fannie and Freddie's exposure to loss. But loans where borrowers originally made down payments of 20 percent or more will not require new insurance for the refi, despite current LTVs over the 80 percent limit.
• The cutoff date for the program is June 10, 2010.

Lockhart said that although Fannie and Freddie would be refinancing portions of their portfolios into lower interest-rate, higher LTV loans, he expects their exposure to financial loss should actually decline.

"In fact, credit risk would be reduced because, after the refinance, the borrower would have a lower monthly mortgage payment and/or a more stable mortgage payment," he said.

This, in turn, would lower the probability of loss-generating defaults and foreclosures by those borrowers.

Because Fannie and Freddie operate under direct federal control -- known as conservatorship -- any additional losses to the companies would inevitably be borne by taxpayers.

How it works out may well depend on whether the Obama administration's broader efforts to stabilize housing prices, reduce foreclosures and push the economy out of recession are successful.

If large numbers of beneficiaries of these special refinancings ultimately cannot afford to pay even their cut-rate replacement loans and thus go into foreclosure, red ink could flow in rivers from Fannie and Freddie.

Because that's an unknown and the refi program is an immediate, here-and-now money-saving reality, homeowners ought to make the most of it.

If you know that Fannie or Freddie owns or guarantees your mortgage -- your loan servicer can tell you -- and you have an on-time payment record and an interest rate above today's prevailing levels, start assembling your financial records and get ready to refi.