125% of a home value to be refinanced by Fannie and Freddie

In order to help underwater homeowners refinance their mortgages, the Obama administration on Wednesday widened its foreclosure prevention program. Thus, Fannie Mae and Freddie Mac will refinance up to 125 percent of a home`s value, raising up the current 105 percent loan-to-value cap.

According to Standard & Poor's/Case Shiller home price index, home values in many markets have dropped by 18 percent in the last 12 months. The collapse in housing prices has pushed an increasing number of homeowners underwater, with the money they owe on their mortgage outstripping the value of their home.

In addition, the revamped refinance program expands a housing rescue plan first outlined by the Treasury Department in February that was meant to reduce the costs of homeownership for borrowers who are making timely payments.

Rates on 30-year mortgages remained at record-lows in April and May as the Federal Reserve started to redeem its promise to buy $1.45 trillion in mortgage-related debt. However, those rates went up when the U.S. economy recession began to ease and demand for loan refinancings has tumbled. The higher loan-to-value terms might bring some back to the table, though.

In a related move announced on Wednesday, Fannie Mae and Freddie Mac will encourage borrowers to drop their 30-year loan in favor of a mortgage that matures faster. The two companies will reduce the processing fee for borrowers who choose a 25-year mortgage, for instance.

"The reduction is intended to incent borrowers to select shorter terms and build positive equity in their homes sooner than with a typical 30-year mortgage," Fannie Mae said in a statement.