As rising home values push more U.S. homeowners back above water on their mortgages after years of negative equity, many might be tempted to refinance to lower their monthly payments.
But can they do it
Mortgage interest rates still near record lows are alluring — those who bought during the boom could save a bundle in the long haul. The challenge is securing a refinancing package that makes financial sense and doesn't involve jumping through a number of hoops.
Many formerly underwater borrowers will still face the same hurdles when it comes time to apply for refinancing, experts say: weak credit scores, too little equity built up, and a lack of refinancing options from private lenders.
"You'll see some refinancing but it will be less than what you might expect," said Jay Brinkmann, chief economist at the Mortgage Bankers Association.
That's the case even as more U.S. homeowners move into positive territory on their mortgages, Brinkmann says.
Recent data from housing market tracker CoreLogic show that as a percentage of all properties with a mortgage, the nation's negative equity rate fell to 21.5%, or 10.4 million properties, during the fourth quarter of 2012 from 22%, or 10.6 million properties, in the third quarter.
Nationally, the amount of negative equity declined to $628 billion during the fourth quarter from $670 billion. CoreLogic also found that of homes valued at more than $200,000, more than 80% have positive equity, compared with 72% of those valued at less than $200,000.
Props For Housing Economy That's all good news for the housing markets, says Terry Loebs, founder of Pulsenomics, an independent consulting and research firm that monitors housing and other markets.
"The positive development in the last year or so has been a firming up of a lot of real estate markets across the country," he said. "They are clearly rebounding off the bottom, and the natural course of the recovery will facilitate a degree of refinancing.
At the same time, Loebs says, there is still "a large cohort of borrowers who won't necessarily be helped by modest levels of appreciation.
One problem many of these borrowers face is qualifying for a refinancing loan.
The MBA's Brinkmann points to the fact that homeowners typically need an 80% loan-to-value (LTV) ratio to qualify for a refinance from a private lender.
For homeowners who don't qualify, one option is to buy mortgage insurance, which protects lenders from loss if borrowers default on their loans. But that option doesn't always make sense.
"If they need to pay for mortgage insurance it might be a disincentive to refinance because the money they spend on insurance might be more than the savings they get on a lower interest rate," Brinkmann said.
Borrowers can also get around the 80% rule by applying for refinance programs available through the government, such as the Home Affordable Refinance Program. With HARP, loan-to-value caps were raised from 105% to 125% and then eliminated altogether.
However, there are restrictions on those programs as well.
"If someone is current and paying their mortgage they could qualify for HARP if the loan is backed by Fannie or Freddie," Loebs said. "But HARP does not apply to those who don't have mortgages backed by Fannie and Freddie.
Lawmakers are considering proposals that would transfer underwater loans held by private investors to Fannie Mae (FNMA) and Freddie Mac (FMCC), the government-sponsored mortgage entities. Doing so would require congressional authorization to temporarily change the charters of Fannie and Freddie.
Meanwhile, a couple of other proposals are on the table that would facilitate refinancing of certain underwater borrowers.
These include legislation sponsored by Sens. Barbara Boxer (D-Calif.) and Robert Menendez (D-N.J.); and a separate bill sponsored by Sen. Jeff Merkley (D-Ore.).
HARP Helpers The Boxer legislation would extend HARP for one additional year through the end of 2014. It also would waive a number of fees for HARP borrowers; reduce the requirements for lenders to refinance loans that are serviced by other lenders; and abolish certain employment and income requirements, along with all loan-to-value criteria.
The Merkley proposal would create a special Rebuilding American Homeownership (RAH) Trust. It would buy mortgages of underwater homeowners from mortgage originators and give homeowners options regarding how they can refinance their homes at a lower interest rate.
The RAH Trust program would target homeowners who owe more than their mortgage is worth but have remained current on their monthly payments and meet certain underwriting standards.
Such proposals are designed not only to help more homeowners get a better handle on their debt, but also to free up more money they can spend on other things.
"The common rationale for supporting an extension of refinancing is that underwater borrowers who have shown an ability and willingness to pay will be somewhat less likely to default," Loebs said. "Supporters say this can only be a good thing for the economy — that lower payments will translate into more money going into economy.
Too Much Too Late? However, many lawmakers believe enough has been done to help out already. For example, HARP has allowed about 2 million U.S. households to refinance their loans.
"If you look at states like Nevada, Florida and California, there have already been a lot of people refinancing," Brinkmann said. "And a large portion of those have been eligible for HARP refinance programs.
The key to passing more legislation is to convince enough people that more needs to be done, Loebs says. That won't be an easy sell with so much government- and taxpayer-funded help for the housing market already.
"You are talking about empowering Fannie and Freddie and expanding their charters at a time when so many people on the Hill oppose any expansion," he said. "There's also a lot of people who think it's bad policy and precedent to facilitate the rewriting of contracts. Where do you draw the line?"