Refinancing plan is meant to close repair-cost gaps

Mortgage giant Fannie Mae has developed a program to help stymied hurricane victims who could not cobble together quite enough money from insurance proceeds, Road Home grants or personal savings to rebuild their damaged home.

To prevent such owners from giving up on their houses -- and falling behind on their monthly mortgage payments -- Fannie will help them refinance their loan and borrow additional money to close the gap between the cost of repairs and the money they collected from other sources to pay for them.

"The point is to stabilize families, not sink them," said Anne Segrest McCulloch, a senior vice president at Fannie Mae.

The program is open only to those owners whose mortgage is held by Fannie Mae, a fact that could complicate its transparency. Fannie does not make direct loans to consumers; it buys mortgages that were initiated by other lenders and holds them as investments or sells them as securities.

Consumers are not always aware that Fannie holds their mortgage, and they must contact the company to which they send their monthly payment to verify whether they are eligible for the new program, called the Limited Cash-Out Refinance: Gap Option.

A spokesman for Fannie Mae said the company is working closely with the local firm Standard Mortgage to connect storm victims with the new mortgage product. Fannie estimates that 3,000 households could benefit from the program.

Fannie's executives say they designed the loan for maximum flexibility. Homeowners who refinance through the program do not need to buy mortgage insurance. In some cases, Fannie will let consumers exceed the original life of the loan to pay back the money they borrow to complete storm repairs.

While many rebuilding programs have been designed solely for homeowners, Fannie's gap option is open to landlords who have struggled to fix investment property. Owners can refinance mortgages on single-family homes, multifamily properties with up to four units, condos, co-ops and manufactured housing.

What they cannot do is borrow against the value of their house to bankroll purchases unrelated to storm recovery.

Company executives said they would help property owners calculate how much it would cost to complete repairs above and beyond what insurance or the Road Home had already provided. The new loan amount would include the balance of the original mortgage; closing costs; money sufficient to finish repairs; and a contingency reserve of up to 10 percent of the repair bill.

Consumers, for their part, "need a plan to stay current on their mortgage, and they need a credible contractor," said Tim Carpenter, Fannie Mae's director of community development along the Gulf Coast.

In helping storm victims refinance their mortgages, Fannie Mae has essentially overlooked the damage that Katrina wrought on the home's value. Instead of basing the size of the loan on what the home would fetch on the open market, the company calculates it based on the cost of repairs -- both repairs already completed and repairs yet to be undertaken.

Fannie has imposed no limit on what lenders call the loan-to-value ratio -- how the size of the mortgage stacks up against the "value" of the house, which in this case refers to the total repair cost.

One local mortgage broker said the program could benefit people who received money through the Road Home and their insurance companies but have fallen, say, $30,000 short to complete their renovation.

"If they're going to allow for something like that, it could be a real positive," said Ross Miller, president of Miller Home Mortgage. However, he said homeowners would have to consider how the interest rate they would get from a refinancing stacks up against the rate on their existing loan.

Jon Searles, a spokesman for Fannie Mae, said consumers would not receive the interest rate they had on their original mortgage, but the prevailing market rate.

To obtain a refinanced mortgage through Fannie, consumers must be current on their existing mortgage -- that is, they must have gone without a 30-day delinquency in the past 90 days. The gap option program is scheduled to expire at the end of June.