Several months ago, the Obama Administration was aggressively pushing mortgage refinance programs that would help homeowners underwater with their mortgages. According to the Federal Housing Finance Agency (FHFA), the Home Affordable Refinance Program (HARP) refinanced 78,000 borrowers, at least five percent underwater with their mortgages, into low interest rate loans. The figure includes 11,000 homeowners with 25 percent negative equity in their homes.
The latest data represent an increase in the volume of HARP applications compared to total refinance applications —the largest percentage increase since the program’s inception in 2009. The increase is due to some key revisions made to the HARP mortgage program that went into effective last April.
HARP Revisions Broadens Pool of Eligible Borrowers
Interest rates have exceeded or equaled record lows for 11 of 12 consecutive weeks. Plummeting interest rates combine HARP revisions have motivated more homeowners to refinance their mortgages. Changes to the mortgage program include the following items:
- Eliminate certain fees for homeowners who refinance into shorter term loans and lower other refinancing fees
- Remove the 125 percent loan-to-value ratio for fixed-rate mortgages guaranteed by Fannie Mae and Freddie Mac
- Abolish the need for appraisals if the lender can use automated valuation model
- Waive certain warranties and representations on original mortgages
Borrowers will have to meet other requirements for refinancing, including income verification and lender’s overlays. Only mortgages insured by Fannie or Freddie on or before May 31, 2009 qualify for the program.
In another move to help borrowers refinance their mortgages, starting on June 11, the FHA reduced fees on its streamline refinance program. Borrowers who have current mortgage payments may be eligible to refinance their loans without the need for income documentation or an appraisal.
Falling Short of Target
Mortgage lenders such as JPMorgan Chase & Co Well, Bank of America Corp., and Wells Fargo & Co have not acted aggressively to service the volume of eligible homeowners as expected.
Two obstacles have slowed down the number of homeowners actually taking advantage of the opportunity to refinance to lower interest rate loans: 1) Institutions do not have the staff necessary to service the volume of applications received for HARP, and 2) Lenders refuse to refinance risky borrowers.
Lenders have guarantees against liability for the loans they refinance; therefore, many banks have limit refinancing activities to current customers to reduce liability if the customer defaults. Since HARP program is voluntary, lenders do not have to follow Fannie or Freddie procedures.
Borrowers should understand that lenders could have addition qualifying criteria above the federal guidelines. For example, since the foreclosure crisis, some states have made it a legal requirement for lenders to verify a borrower’s income.
The FHA streamline refinance program has also encountered the same impediments to mass mortgage refinancing.
Competition Nonexistent
Most HARP refinance transactions take place with loan servicer. For some reason, there has been little competition for HARP refinances. What happened with Fifth Third Bank may clarify the reason.
The institution began accepting HARP mortgage refinance applications after the latest revisions. At some point, Fifth Third increased its maximum LTV from 105% to 150%. This means a borrower with an underwater mortgage home valued at $175,000, could qualify for a HARP loan up to $262,500 – to refinance an existing mortgage.
Recently, the bank capped its LTV at 105% for Freddie Mac's Open Access and Fannie Mae's Refi Plus mortgages. The mortgage industry loses one of the main banks for the placement of HARP refinances with 125% LTVs. Market watchers believe Fifth Third wanted to limit the “junk” from other lenders because, regardless of the Fannie or Freddie guarantee, the loans appear as an underperforming assets on its books.
A criticism of the HARP has been the promotion of the program’s ability to help up to four million Americans, but actually falls short on delivery. The FHFA report shows improved numbers for mortgage refinances, but the program continues to underperform compared to the needs of homeowners with underwater mortgages.