Homeowners who are up to 125 percent underwater will be allowed to refinance under the Obama administration’s Home Affordable Refinance Program if they are current on their payments and their loan is owned or guaranteed by Fannie Mae or Freddie Mac.

The federal regulator overseeing Fannie and Freddie has boosted the program’s loan-to-value (LTV) ceiling from 105 percent to 125 percent to allow more homeowners to take advantage of lower mortgage rates.

Fannie and Freddie will also offer pricing incentives to encourage borrowers with LTVs above 105 percent to refinance into 20- or 25-year loans to pay down principal more quickly and reduce lifetime interest payments, the Federal Housing Finance Agency said.

When the Home Affordable Refinance Program was announced in February, the Obama administration said it hoped that as many as 4 million homeowners will be able to refinance under the program.

But some critics said the program wouldn’t help borrowers whose loans aren’t backed by Fannie and Freddie, and that the 105 percent LTV ceiling would exclude many who are deeper underwater because of steep home-price declines (see story).

The Mortgage Bankers Association last month revised downward its forecast for 2009 loan originations by $700 billion, citing rising interest rates and the slow pace of Home Affordable refinancings — about 13,000, the group said (see story).

In announcing the increased 125 percent LTV ceiling today in Las Vegas, Housing Secretary Shaun Donovan said nearly seven in 10 of homeowners with mortgages in the city owe more than their homes are worth.

Donovan said “tens of thousands” of refinancings and trial loan modifications are under way. Under the parallel Home Affordable Loan Modification Program, 200,000 borrowers have received offers for trial loan modifications, Donovan said. That program, which provides incentives to loan servicers and borrowers for loan modifications, is intended to help up to 4 million borrowers.

In broadening the Home Affordable Refinance Program, the Obama administration could end up going beyond its original stated goal of helping “responsible” homeowners — those who purchased a home with a down payment, only to see their equity shrink or disappear as home values fell.

A 20 percent down payment equates to an original LTV of about 80 percent; a home purchased with no down payment would have an LTV of about 100 percent.

A homeowner who made a 20 percent down payment on a $200,000 home would have had a $160,000 mortgage. Excluding any reduction in principal since purchase, the value of their home would have had to decline by 36 percent, to $128,000, for their LTV to grow to 125 percent.

A key feature of the program is that it allows borrowers who made down payments of 20 percent or more to refinance without having to obtain mortgage insurance. Borrowers who were required to obtain mortgage insurance on their original loan because they made a down payment of less than 20 percent aren’t required to obtain additional coverage.

Home Affordable refinancing into lower-interest-rate loans will help many borrowers achieve lower monthly payments. Those who can afford their current monthly payments may consider moving into a loan with a shorter term than the typical 30-year mortgage, FHFA said.

To encourage the practice, Fannie Mae said it will offer a 0.5 percent reduction in its loan-level pricing on refinancings with LTVs above 105 percent and loan terms of 20 and 25 years.

Freddie Mac said it will offer a similar incentive to refinance into a 25-year loan. The expanded LTVs are available now when borrowers apply for Home Affordable refinancings through their current servicer, Freddie Mac said, and borrowers will not need to be re-underwritten in most cases.

The expanded LTV ratio will become available Oct. 1 to borrowers who wish to refinance with other lenders affiliated with Freddie Mac. Those lenders will be required to re-underwrite the borrower through Freddie Mac’s automated underwriting service, Loan Prospector.

Fannie Mae said it will begin taking delivery of loans with expanded LTVs on Sept. 1. Borrowers with LTVs above 105 percent must refinance through their existing loan servicer, and the new loans must be fully amortizing fixed-rate mortgages with terms greater than 15 years up to 30 years.

Borrowers who wish to take advantage of the Home Affordable refinancings must have a mortgage that’s already owned or guaranteed by Fannie Mae or Freddie Mac, and the separate guidelines developed by each company would apply to their refinance.

Borrowers can determine whether Freddie Mac owns their mortgage by completing an online form at http://www.freddiemac.com/mymortgage.

Fannie Mae’s loan lookup tool is located at http://loanlookup.fanniemae.com/loanlookup/.

Sen. Johnny Isakson — the Georgia Republican whose previous attempt to boost the first-time homebuyer tax credit to $15,000 was shot down in the House — hasn’t given up on the idea.

Isakson, the former president of Northside Realty, has introduced a bill that would not only raise the tax credit’s current $8,000 cap but make it available on any purchase of a primary residence — not just to first-time homebuyers. The bill, S.1230, would also eliminate the current income ceilings of $75,000 for individuals and $150,000 for couples.

In a press release, Isakson claimed bipartisan support for the bill. Although Sen. Chris Dodd, D-Conn., was the only Democrat named among the nine co-sponsors, Dodd carries considerable weight as chairman of the Senate Banking Committee.

The Senate got behind a previous Isakson amendment that would have expanded the tax credit as part of the economic stimulus bill passed in February. But the amendment was stripped from the bill before it was approved by the House.

As originally enacted by Congress in 2008, the tax credit was equal to 10 percent of the purchase price of a primary residence, maxing out at $7,500. Last year, the credit functioned more like an interest-free loan, since it had to be repaid over a 15-year period.

Although the Isakson amendment was stripped from the bill, The American Recovery and Reinvestment Act of 2009 did raise the cap from $7,500 to $8,000 for homes purchased before Dec. 1 of this year, and eliminated the repayment requirement unless a home is resold within three years.

A preliminary review of tax returns suggests as many as 1.4 million homebuyers claimed the first-time homebuyer tax credit on their 2008 tax returns, putting it in on track to reach a target of helping 2 million borrowers by the time the tax credit expires on Nov. 30 (see story).

In addition to expanding the tax credit, Isakson’s bill would extend its availability for one year from the date of enactment, and allow homebuyers to claim it on their 2009 tax return for purchases made next year.

The tax credit has made a difference, Isakson said. But allowing all buyers of primary residences to claim it — not just first-time homebuyers — would help existing homeowners trade up, he said.

“First-time homebuyers used it and the market stabilized, but we don’t have a recession in first-time homebuyers. We have a recession in the move-up market,” Isakson said in a statement.

Expanding the tax credit is one of five recommendations put forward by a Housing Working Group made up of members of The Business Roundtable, an association of chief executive officers of large U.S. companies.

The Housing Working Group, chaired by Richard A. Smith, president and chief executive officer of Realogy Corp., is also urging the government to take additional steps to keep mortgage rates “at historically low levels for at least one year” and to make permanent increases in the conforming-loan limit in high-cost housing markets.

The National Association of Realtors said it backs the working group’s recommendations.

“NAR has called on Congress and the Obama administration to expand the first-time homebuyer tax credit to all homebuyers, regardless of income,” NAR said in a statement. “In addition, it is imperative to maintain mortgage interest rates below 5 percent, make the loan limit increases permanent, and strengthen foreclosure mitigation and loan modification efforts.”

The Federal Housing Administration last month issued guidelines for applying the tax credit toward the down payment and closing costs on the purchase of a home with an FHA-backed mortgage. The tax credit can’t be used to meet the FHA’s 3.5 percent minimum down-payment requirement, except by borrowers tapping down-payment assistance loans offered by some state housing finance agencie.

The IRS has published a Q-and-A on the tax credit and the document used to claim it, Form 5405, on a dedicated landing page.

Some of the most difficult questions I receive from readers concern the relationship between making extra payments and refinancing. I have never been very happy with my answers, and recently took a harder look at how making extra payments and refinancing are related. The hope was that if I understood it better, I could answer the questions better. This article reflects my current understanding, followed by new answers to some common questions.

Extra-payment decisions and refinance decisions should be made independently because they are based on very different factors. Yet each may affect the other, which is why it is easy to become confused.

The extra-payment decision is best viewed as an investment decision. The funds used for extra payments could be invested in CDs or bonds where they would earn the return being paid on those assets. Instead, they are invested in reduced mortgage debt, on which they earn a return equal to the mortgage rate.

What mortgage rate? The rate the borrower would have paid on the balance they pay off, which is their current mortgage rate. In principle, if they anticipate that they will refinance to a lower rate, then that lower rate is the one that will be earned on the extra payments, but that won’t apply until after the refinance, when the extra-payment decision could be reconsidered.

It is very doubtful, however, that a rate-lowering refinance induces many borrowers who have been making extra payments to reduce them. The principal motivation for making extra payments seems to be to get out of debt faster, and the refinance won’t change that.

Borrowers refinance for several reasons: to reduce the rate; reduce payments; reduce risk of future rate increases; and to raise cash. Only rate-reduction refinances may be affected by extra payments.

The decision to refinance in order to reduce rates involves a judgment that the savings from the rate reduction, over the period the borrower holds the new loan, will more than cover the refinance costs. The three most important factors in this judgment are the size of the rate reduction, the refinance costs as a percent of the balance, and the life of the new loan. Calculator 3c on my Web site pulls these and other factors together to generate an answer.

How can extra payments affect the refinance decision? Those made in the past don’t figure directly in current decisions. However, past payments have reduced the loan balance, which reduced the benefit from a subsequent refinance. As balances become smaller, the benefit from refinancing shrinks and at some point disappears. Indeed, few lenders are interested in refinancing loan balances of less than $50,000.

Extra payments that borrowers expect to make in the future should be factored directly into the refinance decision process. Extra payments reduce the expected life of the loan, which (other things the same) reduces the benefit from the refinance. In using the refinance calculator, you should shorten the term of the new mortgage. If you plan to refinance into a 30-year loan, for example, but extra payments would result in payoff in 20 years, you should use 20 years as the term.

Here are three questions I receive quite often:

“I have been making extra payments on my mortgage consistently. If I expect to refinance in the near future, should I continue with the extra payments?”

There is no reason not to. The benefit from the extra payments you are currently making, consisting of the balance reduction, is not affected by a subsequent refinance. After the refinance, the return on additional extra payments will be lower because of the rate reduction. This might cause you to reduce the payments, but probably won’t for reasons indicated earlier.

“I am trying to decide whether to refinance into a lower rate or pay off my entire loan balance …”

These should not be viewed as alternatives. Make the investment decision first, based on the rate expected in a refinance. If it is a good investment at that rate, do it. If the investment decision is negative, then assess the profitability of a refinance.

“Am I better off making extra payments on my existing loan or refinancing it?”

These should not be viewed as alternatives. Make the refinance decision first; if it pays to refinance, do it. Consider whether you want to make extra payments after you refinance or if you don’t refinance.

Guarded optimism returned to the hallways at NAREIT’s conference last week in New York City, replacing the economic gloom and doom that shrouded the last real estate investment trust industry gathering in San Diego last November. But for all the talk of “green shoots” in the credit markets and broader economy and this spring’s stock market rally, it still remains to be seen whether the recent rallies in REIT share prices and the raising of nearly $15 billion through 45 public equity offerings since the beginning of the year will take root in an economic landscape littered with continuing job losses and weak property fundamentals.

Certainly, attendees of the National Association of Real Estate Investment Trusts REITWeek conference at the Waldorf Astoria were in a less dour mood. And why not — equity REIT share prices, which fell 15.7% in 2007, nearly 38% in 2008 and another 39% in 2009 before reaching a low on March 6, have since rallied by more than 60% through June 9, according to the MSCI US REIT Index.

The optimism has been fueled by the “re-equitization” of many REITs through secondary offerings over the last few months. NAREIT released an analysis last week predicting that publicly traded REITs will raise $582 billion for acquisitions representing $728 billion in property value, including debt, by the end of 2012. The surplus equity should begin to create acquisition activity by the second quarter of next year.

Just two months ago, analysts said the amount of equity being raised would come nowhere near the need. Citigroup estimated that REITs would need $35 billion in total equity to bring the sector down to 50% leverage at a presumed 8% cap rate. To reduce leverage to 45% would require $57 billion in equity.

While conference panelists agreed that raising the necessary equity will be a tall order, REITs could reduce their average debt from the current 53% to as low as 25% if NAREIT’s prediction comes true. That would free up capital for a reprise of the early 1990s, when investment trusts led the way out of a previous commercial real estate recession by using equity raises to fund massive purchases of distressed assets.

Survival of the Equity-Richest

Meanwhile, many public companies that went private during the private-equity boom of 2005-07 will likely re-emerge in coming years as REITs, at vastly lower leverage of course. With stepped up IPOs, acquisitions and increased market capitalization, REITs could grow to a 31% share of the broader commercial real estate market by the end of 2012 from roughly 5% at present, according to NAREIT. Firms raising equity capital in recent months include retail and office owner Vornado Properties Trust, mall operators Simon Properties and Kimco, data center developer Digital Office Properties Trust, among numerous others.

A number of entities have filed for initial public offerings, mostly to become mortgage REITs. Most recently, Starwood Capital said in a filing that has launched Starwood Property Trust (SPT), which will register as a REIT and raise as much as $500 million in an IPO to buy distressed commercial and residential real estate. Barry Sternlicht, former chairman of Starwood Hotels, will be the CEO.

The entity will use financing from the government’s Term Asset- Backed Securities Loan Facility (TALF) and Public Private Investment Program (PPIP). Starwood Property said in its filing, “we believe that the next five years will be one of the most attractive real estate investment periods in the past 50 years.”

Access to public markets will separate the REIT “haves” from the “have-nots” over the next three to five years, but will also provide a distinct advantage over their debt-riddled and capital challenged rivals in the private sector, panelists agreed during a session on REITs and investing last week.

“Re-equitization creates a huge opportunity,” said Thomas Carr, former head of CarrAmerica Realty Corp. and current managing partner of Federal Capital Partners, a private REIT specializing in acquiring assets in and near Washington, DC. “This is one of those watershed events like the early ‘90s where the public companies have an opportunity to dominate. Private market fundamentals will continue to deteriorate for at least the next 12 months.”

“Demand for REIT equity has been incredibly robust,” said Debra Cafaro, chairwoman, president and CEO of Ventas, a healthcare REIT, during another session. “The mere act of raising capital by REITs has fueled a virtuous cycle of an improving equity market for REITs that has in turn led to more equity raisers and engendered more investor confidence.”

“With confidence returning to the REIT, debt and equity markets, the REIT picture looks brighter, although certainly not clear,” Cafaro said.

The public markets are likely the only source of capital that can fill the void in the commercial real estate industry’s “huge mess” of maturing debt and weak fundamentals, said Mike Kirby, chairman and director of research at Green Street Advisors.

“There needs to be enormous amounts of new equity coming in to recapitalize the commercial real estate industry,” Knott said. “That number is certainly over $100 billion; it’s probably a multiple of that in terms of total equity capital that real estate needs.”

With private equity mostly unable to raise new funds and pension funds for the most part unwilling to allocate capital to real estate, “the public market will be driving everything. Its cost of capital will be driving real estate pricing,” Knott said.

“It could be a very profitable time because when your cost of capital drives the prices of the assets you’re buying, it’s almost guaranteed to be a pretty good business.”

Recovery: Still a Gleam in the Eye

Despite the opportunities for REITs, recovery from the worst recession since the 1930s is nowhere on the horizon for either commercial property markets or the broader economy. Job losses will extend well into next year. Occupancy and lease rates continue to deteriorate.

“The fundamentals I think are going to be as big of an issue that the financing issue has been in the last six months,” said Knott’s co-panelist Kenneth Rosen, chairman of Rosen Consulting Group.

The new money that will flood into the system from equity, new Federal Reserve policies and government stimulus could help reverse some of the pain from job losses by next year, Rosen said, “but it’s only going to create a more moderate recession. We’re not going to go into a recovery. We’ve lost 5.8 million jobs, most of them in the last six months. We can’t really say there’s light at the end of the tunnel for the real estate sector.”

Hamid Moghadam, chairman and CEO of industrial owner and developer AMB Property Corp. (NYSE: AMB), said that unlike debt-free companies like Microsoft and Cisco, it’s very difficult for real estate companies to operate without leverage.

“Real estate has this huge private market on the side that is highly levered. I maintain it’s because nobody is prepared to tell their investors that real estate is a low teens return business,” Moghadam said. “Unless you tell people that it’s 25-30%, you can’t raise money. It’s a circle that keeps picking up speed until it hits the wall and everyone gets super conservative again.”

People just got mesmerized by astronomical returns, Rosen noted.

“Core real estate is a 6- 7% return, with growth into the low teens. Anything else is produced by leverage and high risk. That’s enough return. If you want more than that, you’re gambling.”

Carr said one of the main lessons of the last two real estate cycles is “anytime you get too much cheap money in the hands of real estate people, it’s a dangerous moment. You start seeing massive investment at unprecedented levels.”

“The one question I would urge any investor to ask is, ‘what do you have to believe in terms of the future and growth rates, order to think this is a good investment?’”

Zell, Zuckerman Weigh In

Not surprisingly, two of CRE’s most conspicuous icons, publisher and Boston Properties Chairman Mort Zuckerman and Tribune Company head and Equity Group Investments Chairman Sam Zell, remained bullish on REITs and predicted that companies with strong cash positions will absorb weaker rivals weighed down by maturing debt and troubled assets.

The men differed during an exchange at the conference on such issues as whether a large number of IPOs will be launched or whether government stimulus and the Federal Reserve policies such as the TALF will help the market. But they agreed that REITs have a bright future.

“The REIT model has worked,” Zell said. “17 years is not a very long period of time for an industry. The last 12 months have been a test and the industry has passed. Frankly it has passed with flying colors.”

One of the best — and easiest — streamline refinance programs is available to consumers who now have a loan guaranteed by the U.S. Department of Veterans Affairs.

The VA streamline, known as the Interest Rate Reduction Loan, has no “season” requirement, meaning that borrowers who refinanced recently still are eligible. In addition, the loans entail very little documentation and usually do not require an appraisal.

In order to qualify, borrowers must have a current VA loan. The interest rate varies on the loan type (some 30-year fixed-rate loans are now less than 5 percent) and the length of the loan cannot exceed 360 months. Payments are due monthly. No more than two points may be rolled into this loan plus the allowable closing costs. A funding fee of approximately 0.5 percent is typically collected before closing and can be financed into the loan. Funding fee exemption is possible upon proper verification of disability.

VA lenders will ascertain that borrowers meet basic program requirements including:

* The new monthly loan payment must be for less than the original loan.

* The interest rate must be for less than the original loan (unless refinancing an adjustable-rate mortgage).

* The term cannot exceed 360 months or no more than 10 years more than the original loan term (up to a max of 360 months).

VA loans are guaranteed by the Department of Veterans Affairs and can be used to purchase a single-family home, including a townhouse or condominium unit in a VA-approved project, to build a home, and purchase and improve a home. Loans are assumable under certain conditions and do not have a prepayment penalty.

The VA program began in 1944 when President Franklin D. Roosevelt signed the Servicemen’s Readjustment Act into law. This bill, which eventually became known as the GI Bill, allowed veterans to purchase homes without making a down payment. The VA fixed-rate loan gives borrowers the option of financing their mortgage in 15-, 20-, 25- or 30-year terms.

The perception that a VA loan guarantee can be used only once is incorrect. If your original VA loan was paid off, you are eligible to use the guarantee again. If you purchased a previous home with a VA loan and the buyer assumed your loan, your eligibility can be restored only when the assumer has paid off the loan. The only other alternative would be if the assumer is an eligible veteran who is willing to swap his or her available eligibility for yours.

Some seniors and aging boomers still don’t know that reservists are eligible for VA programs. After 50 years of offering loans only to vets who served active duty, the VA changed its ways in 1992. Men and women who have completed six years in the Army, Navy, Air Force, Marine Corps or Coast Guard Reserves, or the Army National Guard or Air National Guard, are eligible for VA home loans, including programs with no down payment.

While federal regulations require that all loans insured by the Department of Veterans Affairs be used only to acquire a “primary residence,” it is possible to purchase a second home using your VA loan guaranty. As in many cases involving the use of real estate, the definition of primary residence is the place where you live “most of the year.” So, if you use the home more than six months of the year, it can be defined as your primary residence.

For example, let’s say you are getting ready to retire (or can work from a home anywhere) and want to buy a home in Arizona to escape the colder months of the year. However, you also wish to spend time locally with your family, so the plan is to use the Arizona home October through April. That seven-month period would constitute the largest block of time you lived in any one place. Therefore, your new home in Arizona would qualify as your primary residence.

The VA requires that you move into the home in a reasonable amount of time and that you keep it as your primary residence. If those are your intentions at the time you apply for the loan, then there is nothing to keep you from using your VA guaranty to purchase a second home or retirement property.

The VA now provides attractive, underestimated options for refinance and new purchase loans. It might make sense to do your research.

With banks again writing big mortgages, such as $1.1M for this ocean front home on Parker Lane in Marblehead.

Bad economy be damned. The market for a $6 million mortgage is not dead in Boston. In fact, demand for mega mortgages — $1 million and up — is on the upswing.

Bank and real estate executives say their wealthy clients still remain wary of the economy’s sharp needles, but acknowledge that with the Dow Jones Industrial Average up nearly 2,200 points over the past three months there’s growing confidence about the direction of their fortunes. That new confidence is liberating wealthy homebuyers to borrow again.

Jumbo mortgage activity is percolating even with virtually no secondary market for the loans.

Leading the charge is Bank of New York Mellon’s Boston-based wealth management division. The company’s in-house mortgage operations in Boston cater to the nation’s top 1 percent of wealth and have put up record numbers this year.

“We’ve seen significant growth,” said Erin Gorman, national sales director for the mortgage business at BNY Mellon Wealth Management. “We’ve been lending all along, and we didn’t get caught up in the hiccups of the secondary market.”

During the first five months of 2009, BNY Mellon’s jumbo mortgage activity is up 32 percent on a dollar volume basis, compared with the year-ago period. Gorman said Boston is one of the best markets.

Jonathan Radford, Coldwell Banker Residential Brokerage’s No. 1 Boston agent in 2008, said there has been renewed interest in the high-end market since April 1. He said 36 properties, of $1 million and up, went under agreement in March, and that figure jumped to 105 in April and 170 in May.

Even though BNY wealth management’s average deposits fell 12 percent in the first quarter, the average loan balance surged 23 percent to $5.4 billion, compared with the year-earlier period. That increase was fueled by a record level of jumbo mortgage originations. With an average size of about $1 million, jumbos have been a bright spot amid lower asset and wealth management fees, according to analysts at Barclays Capital.

BNY Mellon doesn’t discuss individual mortgage deals, but real estate records filed in Boston reveal plenty of big-ticket deals in recent months. Rivals include Boston Private Bank & Trust Company, First Republic Bank and even some community banks, such as Needham Bank, have stepped in to meet demand.

BNY Mellon, however, seems to have the most capital to throw around for its clients.

For example, recently retired Staples Inc. director Martin Trust took out a $6.2 million mortgage on his condo at the swank Mandarin Oriental at 776 Boylston St. Trust received an interest-only, adjustable rate mortgage from BNY Mellon that starts with a fixed interest rate of 4.75 percent, according to documents on file at the Suffolk County Registry of Deeds. The interest rate will adjust to 2.25 percent, plus the one-year London Interbank Offered Rate (LIBOR). Today, that’s cheap money, about 3.85 percent, because the one-year LIBOR rate has been about 1.6 percent. Another recent deal was a $1.16 million mortgage Boston Private wrote for the owners of a Beacon Hill residence on Mount Vernon Street, records show.

John Sullivan, executive vice president of Boston Private Bank’s residential lending department, said even wealthy clients have to feel secure about their jobs and their incomes before taking out big mortgages.

“It’s the same as someone taking out a $200,000 mortgage,” Sullivan said.

Like BNY Mellon, Boston Private originates adjustable-rate mortgages and holds them in its loan portfolio. When the global credit crisis vaporized the secondary market for jumbos, portfolio lenders could keep doing what they were doing because they were not relying on anyone else to buy their loans.

Another advantage also materialized: portfolio lenders scooped up new clients whose banks stopped doing big jumbos when the secondary market froze.

Gorman said some rival lenders are returning to the jumbo market as the economy stabilizes.

“As money elsewhere dried up for borrowers, we earned a reputation as the go-to player in jumbo mortgages. And that puts us in a strong position as other lenders gingerly move back onto the field.”

Lanse Robb, who brokers the sale of mansions and estates on the North Shore for LandVest Inc., said prices have come way down in the past year, but buyers still want a discount even after asking prices have been lopped off by millions of dollars.

“When they feel this is the bottom, the jumbo market will really take off,” Robb said. One of his most expensive listings is the $12.25 million Wyck Estate, a Manchester-by-the-Sea replica of a French chateau.

Sullivan said jumbo mortgage lending presents a great opportunity for a bank to expand its relationship with a client. New business, he said, is mostly referrals from other clients, real estate brokers, financial advisers, lawyers and accountants.

“The mortgage leads the way as an introduction to the bank,” Sullivan said.