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MORTGAGE REFINANCE

Which Government Program Helped the Most and What the Fed Has in Mind for 2013?

Written By:
December 04, 2012 at 11:59 PM

HAMP HARP 2.0 in 2013

The major criticism about President Obama’s housing programs has been the failure of the programs to help as many homeowners as were originally intended. The first program called the Home Affordable Modification Program (HAMP) was originally introduced right after the financial crisis in late 2008. When the administration announced HAMP in February of 2009, it promised to help over 4 million American homeowners. The Home Affordable Refinance Program (HARP) came along in March 2009.

Neither program has lived up to its original claims.

Of the two programs, if one is looking to declare a “winner,” after some major revisions, the Home Affordable Refinance Program (HARP) showed signs of finally coming around in the last few months, but the final results will not be known until after December 2013.

HAMP Issues

One of the major impediments to the success of the program was the requirement that every borrower had to prove they had the income needed to qualify for a new loan. According to a book released by the former chairman of the Federal Deposit Insurance Corp, Shelia Blair “requiring a borrower to qualify for a new loan was stupid’.

Blair cited a variety of issues with the program out of the gate, including the large volume of mortgage loans that needed modifications, excessive documentation from homeowners and “under staff” and “ill-trained” loan servicers. The awkwardness of the process spelled failure of HAMP from the start.

According to a report released by the Federal Housing Finance Administration (FHFA) in September, 825,478 homeowners remain in permanent modifications. The number of household in trial modifications totaled about 66,785 as of July. The most depressing number-- 1,005,594 permanent and trial modifications entered in since 2009 were cancelled.

Many borrowers complaint that the HAMP, which was supposed to reduce borrowers monthly mortgage payments if they were delinquent or endangered of falling behind due to a loss of income or increase household expenses, actually force them into foreclosure.

Home Affordable Refinance Program

Like the Home Affordable Modification, HARP was badly designed from the start. It was designed to help homeowners who owned more on their mortgages than the market value of their homes. However, HARP limited the loan-to-value (LTV) ratios for refinancing those underwater mortgages to 125% of the home value on through March 2012.

Considering that the average home price dropped 35% across the nation, between 2007 and 2012, and over 50% in places like Nevada, Arizona and Florida, many homeowners could not qualify.

In October last year, the FHFA finally eliminated the cap on the LTV and eliminated some mortgage refinancing fees. In addition, second home owners and investors could now qualify. The program, originally schedule to end December 31, 2012, has been extended for a year.

So far, without a doubt, HARP has proven to be the more effective of the two programs. But after 4.5 million foreclosures, can there really be a successful program?

Data shows that homeowners are paying off their high interest rate loans at the highest pace in seven years. This activity correlates with the high level of mortgage refinances, which hit a three-year high in the last week in September. According to the Mortgage Bankers Association mortgage refinance applications have registered year-over-year gains for 11 straight months.

However refinancing will probably turn down in 2013.As might be expect, many homeowners who were able to refinance their mortgage have done so.

The MBA predicts interest rates will move up in 2013 with the 30-year fixed rate mortgage climbing to 4.5%

What Will the Fed do in 2013?

With the housing and banking sectors being the only areas showing any signs of growth, the Federal Reserve has announced intentions to continue its mortgage-backed securities (MBS) purchasing program and may even expand it efforts. The Fed hopes to engender more confidence in businesses. Then, they will hire more workers to reduce the unemployment rate and accelerate growth of the economy, which has a paltry 2% growth rate.

Beginning in mid-September, the Fed began purchasing $40 billion in MBSs on top of the $75 billion it was already spend on its other program called Operation Twist, which expires at the end of 2013. As the maturity of short-term bonds expires, the Fed reinvests the principal back into long-term securities. The Fed bond purchasing programs have been instrumental in keeping mortgage interest rates low and fueling the housing market recovery.

The Fed may extend Operation Twist beyond 2013 and has promise to keep the Fed Fund rate (the interest rate banks charge to loan another institution fund for overnight use) low on into mid-2015.

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