Many U.S. homeowners have found themselves in a perpetual state of financial struggle due to lower wages, pervasive unemployment, and falling housing values. This combination of a fragile economy and weak housing market has many borrowers delinquent in their mortgages. Others find themselves at some stage of the foreclosure process.
Despite record low mortgage interest rates, many borrowers could not take advantage of the Home Affordable Refinancing Program (HARP), which allows eligible borrowers to refinance to low interest, fixed-rate mortgages.
One of the underwriting requirements for HARP, a 125 percent cap on the home’s loan-to-value (LTV) ratio, present a major impediment to large-scale mortgage refinancing for many borrowers with underwater mortgages. The LTV ratio refers to the mortgage amount divided by the value of the property. In addition, other rigorous mortgage underwriting standards make it difficult for many homeowners to qualify—even if they have up-to-date mortgage payments.
As a result, the program never came close to helping four millions borrowers as predicted.
Over the past few months, officials in the White House have worked with the Federal Housing Finance Agency (FHFA) to make improvements to HARP, in the hope of assisting more borrowers to refinance their mortgages. Depending on the source, the program will help from 1 million to 2.9 million homeowners.
Who Benefits from HARP 2.0
The intent of the new program, which some people call HARP 2.0, entails putting borrowers in a stronger financial position by reducing their monthly mortgage payments—principal and interest, or refinance them to a fixed–rate mortgage out of riskier products, such as short-term ARMs or interest-only mortgages.
Homeowners who have mortgages owned or guaranteed by the Federal Housing Administration (FHA), or Government-Sponsored Enterprises (GSEs)—Fannie Mae or Freddie Mac, can now participate in the revised program, regardless of the LTV ratio.
If Fannie or Freddie have the necessary property valuation data in their systems, many homeowners will not have to spend money on an appraisal. Eliminating the appraisal also speeds up the underwriting process, which means a faster approval.
Lenders will reduce some fees usually related to the risk of the mortgage-- particularly charges associated with 15-year and 20-year mortgages.
Government –Sponsored Enterprises gain in the form of lower program costs. Homeowners who successfully refinance to low interest rate mortgages will have lower monthly payments. By reducing the financial burden on these borrowers, it makes it less likely they will default on the new loans.
Homeowners and their communities benefit because borrowers will save billions of dollars in disposable income, they would not otherwise have, and spend some of this money in their communities. Furthermore, preventing foreclosures helps stifle the problem of neighborhood deterioration, which typically occurs from boarded up homes.
To encourage participation from mortgage lenders, bankers that refinance mortgages will receive protection from representations and warranties connected with the original mortgages.
Loss Income for Investors
Investors holding GSE mortgage bonds will receive their principal back sooner than expected. This reduces the rate of return they calculated when they invested in the bonds. Moreover, mortgage bond investors will find it challenging to re-invest the capital at comparable interest rates after prepayment of the mortgages.
Moving forward, borrowers with low mortgage interest rates will not have the incentive to prepay their mortgages as interest rates rise. Therefore, investors will not have as many opportunities to purchase mortgage bonds that pay a higher interest rate.
Underwater Mortgages Remain an Issue
HARP 2.0 will not have a significant impact on the housing market, since it does not reduce the mortgage principal. Many homeowners will still have near negative or negative equity in their homes, which engulf nearly 25 percent of borrowers. Some homeowners will choose the option of strategic default and walk away from their mortgages.
Consequently, growth of the shadow foreclosure inventory should slow down, but millions of delinquent mortgages remain in the foreclosure pipeline.
The FHFA expects to release final details of the new initiative around November 15, 2011. Like the original program, HARP.2.0 requires borrowers to be current on their mortgage payments and no delinquencies in the past six months. Eligible borrowers must possess mortgages sold to Fannie or Freddie on or before May 31, 2009.
Homeowners interested in the program should determine if they have a FHA or GSE mortgage.