Homeowners who need to refinance a burdensome mortgage may be heartened to hear that more U.S. states may soon offer home loan refinancing programs similar to those already available from the federal government and at least nine states. The existing programs are limited in scope, but do give some homeowners another option to avoid foreclosure.

So far, Connecticut, Delaware, Maryland, Massachusetts, Michigan, New Jersey, New York, Ohio and Pennsylvania have set up refinancing programs, according to “Defaulting on the Dream: States Respond to America’s Foreclosure Crisis,” a study published by the Pew Center on the States, a research organization in Washington, D.C. Collectively, these states have committed at least $450 million to help homeowners refinance loans they couldn’t afford or take out short-term emergency loans to tide themselves over during temporary financial difficulties. Use this map to find your own state’s housing authority for more information.

States help homeowners turn ARMs into fixed-rate mortgages

State refinancing programs typically:

  • Weigh whether the homeowner’s existing mortgage is or seems likely to become a financial hardship.
  • Allow homeowners to refinance an interest-only or adjustable-rate mortgage, known as an ARM, into a 30-year fixed-rate mortgage.
  • Require homeowner counseling, in part because the federal government has upped its grants for such programs.
  • Require the homeowner to share any future financial gain on the sale of the home with the government agency through an equity-sharing or home value appreciation recapture requirement.
  • Tend to be targeted toward people of modest means.
  • Tend to be restricted to low- or moderately-priced homes.
  • Tend to be predicated on the presumption that the homeowner has some ability to afford a new mortgage.

Here are some of the specific requirements of three state refinancing programs, according to the state housing finance agencies’ websites:

  • Ohio’s Opportunity Loan Refinance Program offers a 30-year fixed-rate mortgage to replace an existing interest-only, high-interest rate or adjustable-rate loan up to 100 percent of the home’s current value. Household income is limited to 125 percent of the median gross income in the county where the homeowner lives. Four hours of homeownership counseling is required. Eligible properties include detached houses, condominiums and townhomes. An optional 20-year fixed-rate second mortgage can be used to pay closing costs, late fees or prepayment penalties on an existing mortgage.
  • Pennsylvania’s Refinance to an Affordable Loan Program also offers a 30-year fixed-rate mortgage up to 100 percent of the home’s value. Homeowners must have a credit score of at least 620 or an acceptable credit history and no more than two 30-day late mortgage payments within the last 12 months and after a rate or payment adjustment The new loan can be used to pay off subordinate mortgages, prepayment penalties, delinquent property taxes and closing costs that occurred within 12 months after the mortgage payment adjustment.
  • Michigan has two programs: Assist Refinance Program and Rescue Refinance Program. Both are open to homeowners who need to replace an ARM or fixed-rate mortgage that has an unaffordably high interest rate. Both programs offer a 30-year fixed-rate mortgage and require a minimum credit score and homeowner education. Annual household income must be less than $108,000 for the Assist Refinance Program or within federal and state limits for the Rescue Refinance Program. The Rescue program accepts borrowers who have made up to three 30-day late payments on their existing mortgage.

State housing agencies exist to support affordable housing, but that doesn’t necessarily mean their programs can or should rescue people in the most dire of circumstances, explains Garth Rieman, director of housing advocacy and strategic initiatives at the National Council of State Housing Agencies in Washington, D.C.

“Almost all of these programs are premised on the idea that there is going to have to be some ability to pay, and they try to match that ability with a mortgage that they can provide; but if there isn’t that ability to pay, and they just can’t make any kind of mortgage work, then those will be people who the states, regretfully, won’t be able to serve,” he says.

That said, housing agencies are “very reliable lending partners and will probably give homeowners very good advice,” Rieman says. “There is virtually no risk of any kind of predatory lending.”

States also offer foreclosure prevention programs

Opportunities to refinance burdensome loans aren’t the only programs that states offer. Indeed, “a growing number of states are pursuing a full range of policies to help homeowners and taxpayers mitigate the harm of the foreclosure crisis,” the Pew study says.

Examples of other state programs include:

  • Foreclosure prevention counseling services.
  • Loans for communities that have been hard hit by foreclosures.
  • Forbearance or modification of mortgages serviced by the state housing agency.

States have cause to be concerned about the adverse effects of foreclosures since “state and local governments and taxpayers likely will experience significant fiscal pain” from foreclosures, the Pew study says. That pain could result from “a serious drop in revenue” in foreclosure-impaired states that “rely heavily on property taxes, real estate fees and sales taxes,” the study says.

Both the rate of foreclosure starts and the percentage of loans in the foreclosure process reached new highs in the second quarter of 2008, according to the Mortgage Bankers Association. The rate of foreclosure starts increased to 1.08 percent of outstanding loans while the percentage of loans in the foreclosure process rose to 2.75 percent at the end of the quarter. Eight states Arizona, California, Florida, Indiana, Nevada, Michigan, Ohio and Rhode Island had rates of foreclosure starts that were higher than the national average.

“The national foreclosure numbers continue to be driven by the hardest hit states continuing to get much worse. The increases in foreclosures in California and Florida overwhelmed improvements in states like Texas, Massachusetts and Maryland,” Mortgage Bankers Association Chief Economist Jay Brinkmann said in a statement.

Federal government gives states go-ahead for refinancing programs

So far, neither California nor Florida has introduced a home loan refinancing program specifically for homeowners who are facing foreclosure. But more states are expected to set up such programs due to the Housing and Economic Recovery Act of 2008, according to Rieman.

What the new law does

  • Adds an extra $11 billion to the national “bond cap,” which refers to the total dollar-value of mortgage revenue bonds, or “MRBs,” that housing agencies can issue each year.
  • Allows housing agencies to use MRBs for refinancing programs, which previously weren’t a permissible activity for MRBs.

The federal government authorizes housing agencies to issue MRBs, which are tax-exempt bonds, and uses the proceeds to finance housing programs in their locality. Two examples of such programs are home mortgages for low- and moderate-income first-time homebuyers and construction of affordable rental housing.

“More states are now considering how they can use the new refinancing authority granted in the housing stimulus bill to provide refinancing through the MRB program,” Rieman says.

The increase in the bond cap will be divided among the states on a per capita basis, will be available for three years and can be used for any allowable housing purpose, not just refinancing, Rieman explains. That means states can choose whether to use their additional allocation for foreclosure-rescue loans or other purposes.

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