In an effort to expand participation in its anti-foreclosure Making Home Affordable program, Fannie Mae and Freddie Mac will refinance mortgages with a loan-to-value (LTV) as high as 125%, up from the previous LTV ratio ceiling of 105%. It is hoped this will broaden refinance eligibility to the five million struggling homeowners sinking deeper underwater.

Borrowers with an LTV between 105% and 125% must refinance their mortgages through their mortgage holder to qualify.

Fannie Mae will also pay lenders half a percentage point to refinance mortgages to bear a shorter term between 20 and 25 years. Similarly, borrowers who refinance their mortgage to a shorter repayment schedule will receive an as-of-yet undisclosed “special price incentive” from Fannie.

first tuesday take: This is yet another pie-in-the-sky attempt to resuscitate ailing markets. However, it will offer little to no help to the vast preponderance of California’s negative equity owners. The Making Home Affordable program, as its moniker implies, focuses on affordability. Unfortunately, affordability is only a straw-man standing in for the larger issue – cramdown of the principal balance.

There have only been a miniscule 80,000 refinances under this program as very few underwater homeowners are in the mood to refinance their mortgages and retain their ultimately negative equity position. Even with an increased LTV ceiling of up to 125%, this is fool’s gold at its best, and economic failure of personal finances at its worst.

Re: “Fannie, Freddie to Refinance Larger Underwater Loans (Updated 3)” from