Last week I posted a few articles on the Obama Refinance Plan stepping up the loan-to-value ratio to 125%.  If we crunch some numbers, we will be able to make a more educated guess as to why this plan was extended and if it will work.  Many officials at HUD “claim” that the original plan to offer 105% loan-to-value has greatly helped with refinancing in the current economy.  They claim that it has been much more successful than the mortgage modification programs put in place.  With that being said, it cannot be “extermely” successful if they had to move the LTV up to 125%.

Zillow makes the point that the change from 105% to 125% increases the percentage of home owners who now have the chance to refinance to 36%; this is 10% more than the original Obama Refinance Plan.  To put that into perspective, that is 20.1 million borrowers versus 14.6 million.  Obviously this greatly increases the amount of home owners who can refinance their mortgages but will it help the housing market at all?

As many lenders are saying, it will makes at least 90 days or more for this plan to be implemented due to the Desk Underwriter automated system.  It is quite possible that average mortgage rates could be quite higher in three months so will it really help home owners save that much money?  If the plan went into effect immediately I would say that the plan would definitely help a great number of borrowers get a low rate mortgage.  Unfortunately, I have a bullish outlook for mortgage rates as I think the 10 year treasury rate will move higher which will pull daily mortgage rates up with it.

Overall, offering underwater home owners a chance to refinance at lower rates is a great thing.  In the grand scheme of things, I really do not feel it is going to help the overall economy.  If the plan were set up to work immediately we could see people refinance and have the ability to stay in their homes.  Sadly, borrowers are going to have to wait and when the rules have been put in place, average mortgage rates may be over 6%.

On July 1st, 2009, President Obama announced that the refinancing part of the Making Home Affordable plan was being adjusted.  When the plan was first released in March, lenders were urged to let home owners with a 105% loan-to-value apply for a home refinance and likely get a low rate refinance.  Obviously this was not enough as it has been up to 125%.  Lets crunch some numbers to try and explain the different.

If you bought a $300,000 home in 2007 and you have paid $15,000 in principal since your purchase, you would have $285,000 of loan left to pay.  If you recently got your home appraisaed and the value was $245,000 you have a 116% loan-to-value in your home.  If this was the case prior to July, you would have no chance to refinance at ANY rate, no less a low rate.  Now that President Obama has extended the Making Home Affordable plan, you have a chance to refinance and it is likely that you will get a decent rate as the government is forcing the lenders hand.

The question that we all must ask is “will this help?”  My answer is no.  Unfortunately it does not matter how low of a rate you allow home owners to refinance at, there is still too much supply on the market.  As long as housing supply outpaces demand, we are going to see a decline in home prices.  To make matters even worse, the 10 year treasury looks to be getter very close to support levels which means we could see a strong short term uptrend soon.  If the 10 year uptrends, you can be sure that average mortgage rates will follow.  This means that home prices will come down even more.

The 125% loan-to-value refinance plan will help many to refinance, but overall I do not think it will help the overall housing market or the economy.  Big time job losses were reported this morning and I will have much more to come on that issue….