Neighborhood decline reversed through inventive refinance program

April 17, 2017 | By

Accessible, affordable housing is a major problem for communities across the country. With problems on both the supply and demand side, local and state agencies and their partners are creating inventive solutions to help homeowners.

One such example is a program from the Illinois Housing Development Authority (IHDA). It’s one of the dozens of state housing finance agencies (HFAs) with which Fannie Mae has a long-term working relationship. Some of these relationships span over two decades.

Last year, IHDA approached Fannie Mae to solidify a solution to help struggling neighborhoods. In particular, it wanted to help homeowners who were paying their mortgage on time and current on payments for at least 12 months but whose homes were still underwater due to falling property values.

These homeowners continued to make their payments — month after month and year after year — yet still faced an underwater mortgage.

The problem was creating a vicious cycle of sorts. Neighborhoods were declining as households continued to walk away from these properties. And that often had a negative impact on the values of nearby homes.

Zeroing in on Chicago

Out of the 100 biggest metropolitan areas in the country, Chicago has the most underwater properties with active mortgages. That’s according to the monthly Mortgage Monitor report Black Knight released on April 3. Even after reducing the number by a third over the last year, Chicago still has more than 168,000 underwater properties.

To address the problem, IHDA wanted to step in to reward on-time homeowners for committing to their properties. The housing authority believed this would help reverse the decline of these neighborhoods and provide a path for building stronger communities.

The ultimate solution was creative. And it is having a major impact on households. Illinois introduced its I-Refi program last summer. It provides $50,000 in federal mortgage assistance to underwater homeowners. They use that money to reduce the balance they owe on their mortgage. And they refinance into a new, more affordable loan based on the home’s current market value.

Fannie Mae provided insights into structuring the program. And it made sure of the eligibility of the new loans for sale to Fannie Mae. The U.S. Department of Treasury’s Hardest Hit Fund provides the funding. The government created the fund in 2010 to assist hard-hit states in the housing market downturn.

The Hardest Hit Fund supports foreclosure prevention and neighborhood stabilization. Those are two of IHDA’s goals. And it aims to eliminate blight in the communities it serves.

How It Works

Under the I-Refi program, the Treasury provides $50,000 in assistance. IHDA uses Fannie Mae’s HFA Preferred product. Released in 2012, it’s one of two product updates Fannie Mae specially designed for HFAs.

As the master servicer and aggregator for IHDA, US Bank sells the mortgage to Fannie Mae. This model allows IHDA to use the proceeds from that sale to facilitate mortgages for other low- and middle-income homebuyers.

As a source of liquidity for HFAs like IHDA, recycling and replenishing these resources can help provide more affordable housing in communities.

Growth Potential

Fannie Mae’s introduction of  updated products for HFAs — HFA Preferred and HFA Preferred Risk-Sharing — has almost doubled year-over-year growth. Today, 40 different state HFAs are using one or both of these products.

Best of all, neighborhoods are stronger. And hardworking homeowners get to stay in their homes.

I-Refi offers a forgivable loan of up to $50,000 to reset the amount the borrower owes on an underwater loan to a level that reflects the decline in a home’s value. It allows homeowners to erase their negative equity and refinance into an affordable 30-year, fixed-rate IHDA mortgage. Before approval of the loan, there must be an appraisal of the home. And the borrower must qualify for the new loan under IHDA’s income and credit requirements.

Spreading the Word

It’s important to get the word out about I-Refi to communities. Fannie Mae has assisted with a mailer to thousands of potentially eligible households. After this mailing, IHDA fielded hundreds of calls that sparked dialogue about the program. Many homeowners thought the offer sounded too good to be true.

To date, I-Refi has assisted 153 households. These households are saving an average of $360 per month through the program. That makes a big impact for many families. Several homeowners have told IHDA they are able to stay in their homes, thanks to the I-Refi program.

One homeowner told IHDA that with their monthly savings they no longer have to rely on credit cards to pay for regular monthly expenses — such as gas and groceries.

The I-Refi program demonstrates the important role HFAs and Fannie Mae play in providing liquidity and bringing stability to communities nationwide. If IHDA didn’t have Fannie Mae’s guarantee on the first mortgages, it would be less likely that a borrower could take advantage of the $50,000 benefit.

Fannie Mae takes pride in its relationships with HFAs and strives to be an investor-of-choice and a trusted partner. As such, we’ll continue innovating to help these agencies and their lender partners serve even more low- to moderate-income households.

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