U.S. raises home refi plan’s loan-to-value ceiling to 125%

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The Obama administration today eased eligibility rules for its Home Affordable Refinance Program, lifting the maximum loan-to-value ratio to 125% from 105%.

The shift, which regulators had hinted was coming, is aimed at making refinancing available to more homeowners whose homes are worth less than their mortgages.

HARP is open to homeowners whose loans are owned or guaranteed by Fannie Mae or Freddie Mac, the mortgage finance giants now under government control. It covers first mortgages only.

The refi program, launched this year, has gotten off to a slow start, in part because the maximum 105% loan-to-value ratio was too low to include many people whose homes have fallen sharply in value.

The new loan-to-value maximum of 125% means an eligible homeowner with a $375,000 mortgage could refi if his or her house is worth at least $300,000. But the borrower still would have to be able to afford the new loan, and income requirements are an increasing problem as unemployment soars and many workers are forced to take pay cuts.

Treasury Secretary Timothy F. Geithner said the move to raise the loan-to-value limit was ‘a crucial step in our broader efforts to get America’s housing market and economy on the path to recovery.’

But refi activity in general remains vexed by the jump in mortgage rates from their generational lows in April. Refi applications to lenders have tumbled since mid-May as rates have surged, according to Mortgage Bankers Assn. data. Despite a down tick in rates in the last two weeks, refi activity hasn’t rebounded.

-- Tom Petruno