New refinance program has limits

President Barack Obama recently announced changes to the Home Affordable Refinance Program that will enable more homeowners who have loans from Fannie Mae or Freddie Mac to refinance their mortgages and avoid foreclosure. The mortgage-bond market, however, is indicating new changes to refinancing rules that will help less homeowners who have underwater mortgages than originally expected.

Bloomberg reported that the announcement from Obama boosted Fannie Mae's 30-year fixed mortgage rate to the highest point since October 4, which could hurt bondholders as prepayments from refinancings curb the interest they earn. Investors can also be hurt by the new refinancing plan because higher interest rates will offer lenders less protection. Banks will be encouraged to focus on qualifying borrowers with high-cost debt because less safe homeowners will be looking to refinance their loans if the rates go back up.

However, the Chicago Tribune reported that the new changes to the refinance program may help real estate investors. Second homes or investment properties can now qualify for refinancing under the changes, as long as the building has fewer than four units, such as a single-family home or a condo.

Unfortunately, participation in the program is only required for Fannie Mae and Freddie Mac, and remains voluntary for other major lenders in the nation. The news source reported that Chase, Wells Fargo, Bank of America and CitiMortgage have all agreed to participate, but they also retain the right to change some of the provisions to the program.

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