One reason for the large number of foreclosures and short sales the last few years is the inability of homeowners that owe more on a home than it is worth to refinance.
Many that purchased their homes during the hot market in ’05/’06 the 2004-2007 time-frame purchased with adjustable mortgages – some of them with very unfavorable rates after the first few years. The “plan” at the time was that you would buy as much house as yo could afford based on the initial lower ARM payment – and simply refinance when the rates went up. However, when prices started falling and credit became scarce people ended up with homes they could not afford and could not refinance or sell.
With a new proposed rule change, the government’s existing Home Affordable Refinance Program (HARP) would be available to homeowners who owe more than 125% of the value of their home (it currently is available up to 105% of the value.) So, someone with a mortgage of $250,000 could possibly qualify, even if the appraisal on their home came in at only $200,000. This would indeed make homes more affordable with the current 30 year fixed rates at about 4%.
The borrower would still have to qualify – lending standards are tougher these days – even for HARP. Also, homeowners would have to be OK with putting more money into an already underwater home in the form of closing costs etc.