The idea is to bail out borrowers who bought houses with interest-only loans or adjustable rate mortgages (ARMs) that had low initial rates and who now face negative equity and huge payment increases due to re-setting mortgage rates, says Joel Ghitman, director of homeownership for the Ohio Housing Finance Agency.
Ohio saw the third most foreclosures (36,524) of any state in the nation in the second quarter of 2007. Only California and Florida had more, according to RealtyTrac, an online service that tracks foreclosure activity and serves as a marketplace for foreclosed properties.
Ohio is just one state to launch a mortgage refinancing program aimed at assisting residents with troubled loans. Other states include Massachusetts, New York, and Pennsylvania, says Sandra Cutts, director of communications for Fannie Mae, which is partnering with Massachusetts and Ohio. Among those considering launching a program are Maryland and New Jersey, according to their state Web sites.
The primary mortgage products that Ohio is targeting are interest-only loans, or ARMs that have pay options, as well as 2/28 ARMs, which feature a fixed rate for the first two years, then 28 years with adjustable rates, which often re-set more than once a year, Ghitman says.
"The payments can go up significantly, and in most situations, the borrowers qualified at the initial or start rate," Ghitman says. "We have found that after one or two adjustments, their incomes did not keep pace with the adjustments on the loans, and they can no longer afford those products."
The Ohio Housing Finance Agency struck a deal with Fannie Mae, in Washington, and U.S. Bankcorp, in Minneapolis, that allows Ohioans with loan trouble to apply for a refinancing package that would pay off their initial loan and replace it with a 30-year fixed-rate loan offered by U.S. Bankcorp, and guaranteed by Fannie Mae. The current rate offered by the state program is 7.5 percent, Ghitman says.
The program launched April 2. So far, 15 people have refinanced, and 99 more are in the process, Ghitman says. The program offers loans up to 100 percent of the current appraised value of a home. The program requires a new appraisal for all applicants.
A problem for many Ohioans is that their mortgages are worth more than the current value of their homes. Many bought at the peak of the market and values have fallen since then. Those with negative equity do not qualify for the refinancing program, unless they can convince their original lender to take a loss and take payment on the current value of the home.
Individual homeowners have struggled to make their case with original lenders, Ghitman says, and the state has asked third-party counseling agencies to work on behalf of borrowers to convince lenders to take a loss. So far the results "aren't great," Ghitman says.
The counseling agency tries to, "explain that if this borrower doesn't refinance, the odds of them going into default and the lender having to foreclose increase dramatically," he says. "And writing off a portion of the loan is a lot less expensive than having the lender go through the foreclosure process."
And lenders might have good reason to listen, says Mortgage Bankers Association public affairs director John Mechem. On average, it costs a lender $30,000-$50,000 each time it forecloses on a house, Mechem says.
"Lenders will have to weigh the potential loss they may take on a loan they sell to the state versus the expected cost of foreclosing and ultimately selling the house themselves," he says. "Perhaps, some will find it easier and cheaper just to take the loss involved in selling the loan to the state."
Ohio's refinancing program offers an option to take out a 20-year second mortgage for up to 4 percent of the value of the home to help pay off the first loan or prepayment charges relating to paying off the initial loan, late fees, or attorney fees. The rate for the second loan is set at 2 percent above the rate of the first refinancing mortgage.
The state requires a minimum of four hours of face-to-face counseling and education before a homeowner can refinance. As part of counseling, proof of income and all other monthly debt payments is required, along with verification that the home to be refinanced is the borrower's primary residence. The counselors figure out if a borrower has too many monthly debt obligations and if they can afford to make their monthly payments through the state program, Ghitman says. If the applicants have to pay more than 45 percent of their monthly income out in obligations, they will not qualify, Ghitman says.
"We've got pretty good assurance, unless somebody is manufacturing pay stubs and bank statements, that these are pretty accurate," he says. "Granted, if somebody wants to cheat the system, they'll find a way."
Ohio eventually will issue $100 million in bonds to fund the program. Thus far, less than $13 million has been obligated through the 15 loans refinanced and the 99 in the pipeline, Ghitman says. Once the amount obligated hits $25 million, the state will issue bonds. Massachusetts's program calls for it to issue $250 million in bonds, Fannie Mae's Cutts says.
Ghitman says that the demand for the program in Ohio is very strong, but few loans are in the process of being refinanced because many residents do not qualify due to negative equity. There is another segment of the population that simply does not know that their loans are going to re-set at higher rates, he says.
"A number of homeowners don't even know that they're in adjustable rate mortgages," Ghitman says. "I don't want to say the lenders misled them, but I don't think those things are always communicated as well as they should be."
That's why the states and Fannie Mae are stepping in to try and help.
"Our view is that this is all about solving a problem," Cutts says. "There are no winners when a home mortgage is foreclosed - it is costly for Fannie Mae, as the investor, as well as the servicer, and it is a terrible ordeal for the homeowner."
And the problem is only going to get worse, Ghitman says.
"There's a tremendous number of loans that are set to re-set in the fall of 2007 and beginning of 2008," he says.
Learn more about markets featured in this article: Minneapolis-St. Paul, MN.