There has been a lot of hoopla regarding President Obama’s announcement of a revised mortgage program (Home Affordable Refinance Program – HARP) to assist underwater homeowner’s in refinancing. There is a lot of misinformation about the program and what it aims to accomplish so I figured I would provide a few facts and insights about what HARP 2.0 is actually trying to accomplish and how it will or won’t work.
First, this is an EXISTING program that has been in place for the better part of two years. Second, the program has nothing to do with helping homeowner’s who cannot afford their current home. HARP was intended to assist homeowners who still qualify income and credit wise under normal and current mortgage guidelines. However, because the value of their home may have declined precipitously they are unable to refinance due to loan to value restrictions. For example, you bought a home with 20% down five years ago at a rate of 6%. Current rates are at 4% or you wanted to refinance into a 15 year fixed at 3.25% to shorten the amortization term. Unfortunately, current appraisals show the values in your neighborhood have declined enough to wipe out your equity and despite your initial large down payment, you now have a loan that has a 100% or more loan to value. You are now unable to refinance. HARP was put in place so these QUALIFIED homeowners can take advantage of lower interest rates.
Like most government programs, the original HARP program was not very effective only assisting around 800k homeowners. The main reason the program didn’t work as well as intended was because all the interested parties didn’t come out to play as many of us in the industry predicted. There were issues with second mortgages not agreeing to re subordinate behind a new mortgage. Private Mortgage Insurers (PMI) were not agreeing to transfer the PMI policies to new mortgages. Fannie Mae/Freddie Mac had loan level price adjustments that eroded the benefits by making it too expensive to refinance. Finally, because banks were not absolved of the liability of refinancing higher LTVs, many lenders just refused to do the higher loan to value deals capping them at 105% loan to value in most cases.
The new HARP 2.0 program is designed to remove some of the barriers that limited the program’s success the first time. For example, LTV restrictions are being removed entirely and the “reps and warrrants” are being adjusted so lenders are not being held liable for following the rules of the program as designed. Loan level price adjustments will also be removed so that the borrowers are actually able to get current market interest rates. Further, the new program is actually going to encourage homeowners to take on shorter amortization loans this time instead of just refinancing to a 30 year fixed. By putting these homeowners in shorter term loans, they will build equity much faster and pay much less over the life of the loan. I believe what is actually going to happen is we will see a refinancing wave of borrowers going into 15 or 20 year mortgages instead of 30 year fixed rate loans.
At this point, the specific details of the program have not been released yet and are due out November 15th. Then banks will have to make preparations for new refinancing deals so the program may not actually be available until December or even January. Finally, your loan must be owned by Fannie Mae or Freddie Mac and originated prior to June of 2009.
My prediction is that this program will help many of the homeowners who fell through the cracks the first time around. However, it still will not solve the housing problems we face because it is limited to Fannie Mae and Freddie Mac loans. There are still several million home owners who are underwater who do not have loans currently serviced by Fannie Mae/Freddie Mac. Until those loans are addressed, the housing market will continue to falter.
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