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Reduced Lender Liability May Offer Relief to Thousands of Borrowers

Written By:
November 16, 2011 at 1:25 PM

Mortgage lenders jittery about “loan put back” possibility with the new Home Affordable Refinance Program (HARP) may have nothing to worry about, says the Federal Housing Financial Agency (FHFA).

The updated program reduces the liability of one key element from the previous program--the appraisal.

The appraisal process on an upside-down mortgage loan may position the lender to be at “put back” risk. “Put back” risk is when the lender who originated the mortgage has to buy back the loan for violating underwriting guidelines for a Fannie or Freddie mortgage.

With lenders responsible for the appraisal, nailing down a “correct” appraisal has been extremely difficult during these underwater times.

Because this could become an extremely costly affair, some major loan institutions have danced around even participating in the original version of HARP, concerned they would be on the hook for having to repurchase faulty mortgages.

New HARP Reduces “Put Back” Risk and Expenses

Although there were concerns with regard to the previous program, the FHFA says that lenders who participate in new HARP will not have to deal with the possibility of having to re-purchase loans.

Why? The revised appraisal process reduces the likelihood that lenders will have to take on the purchase of misrepresented mortgages. Government officials say that with new the HARP, it will be the two mortgage giants, Fannie and Freddie determining the property worth, which will remove the burden from the lender.

On Tuesday, November 15th FHFA’s agency chief, Edward DeMarco testified about new HARP on Capitol Hill. It was at that time when lenders learned to what extent their liability for bad loans will be waived.

During his testimony before Congress, DeMarco said, “Finally, the Administration has been actively involved with the FHFA in making changes to the Home Affordable Refinance Program (HARP). The President has stated that he ‘directed (his) economic team to work with the Federal Housing Finance Agency in the lead up to the recently announced changes and has referred to ‘executive actions’ he took in this matter. These changes to HARP could have a significant impact on the financial health of the GSEs and could impact housing finance reform.”

Bose George, an analyst with Keefe, Bruyette & Woods Inc says that the new program may be just what lenders need to open the doors to more refinances.

"For those originating the new loans, they will look at how these waivers are going to structured," he says. "If they provide enough of a comfort zone, these changes to the representations and warranties could bring meaningful participation."

According to Manoj Singh, former Freddie Mac SVP/Pricing and Securitization and currently a special advisor to the Collingwood Group, the reduction of the put back risk will open numerous opportunities for lenders.

“I think there may be some exceptions in the case of fraud, but it is a major step and it is big relief for the lenders and will encourage them to go ahead and crank up their HARP machines,” he says.

Additionally, Singh believes that extending the program deadline will also provide access to more borrowers. Now borrowers have until December 31, 2013 for mortgage loans sold to Freddie Mac or Fannie Mae on or before May 31, 2009.

As lenders’ comfort level with the new program increases, borrowers may find that their comfort level may be cozier as well--especially in terms of savings.

With the elimination of pursuing an appraisal out of the way, borrowers will actually save money with the new program. Sarah Wartell, EVP/Center for American Progress estimates that the average borrower will save up to $400 for an appraisal. She says that in the past borrowers would spend the money for the appraisal but then be turned down under the previous program.

New HARP May Reach More Borrowers

Most importantly, with some of the roadblocks out of the way, new HARP will open refinance opportunities for more borrowers who are in desperate need of assistance.

Barclays Capital analysts say that up to 3.1 million loans are candidates for HARP but only 894,000 have used the program to refinance. FHFA estimate that this number could double under the new program

In the past borrowers could only refinance a mortgage that was 25% more than the current home’s value. With an estimated 11 million borrowers considered to be underwater in their loan, this initial qualification excluded the majority of homeowners.

Today, the new program appears to be a beacon of light for man. Rick Sharga, EVP/Carrington Mortgage Services believes its possible for the new program to double the number of refinanced mortgages because those who are even submerged deeply underwater can qualify.

New vs. Old HARP

The old HARP program, originally designed to breathe life back into underwater borrowers, required a slew of standards to be met. Instead of providing refinance relief for millions of homeowners, it only helped a small fraction.

This October, the Obama administration unveiled an updated HARP program that slashed a number of those requirements, including the mandate for obtaining an appraisal.

Other changes include the elimination of the 125% LTV restriction and certain fees are being waived to get the process chugging forward. The program can only be applied toward Fannie Mae or Freddie Mac backed mortgages and the homeowner must be current with loan payments for at least the last six months.

Another major bonus is that the new guidelines allow you to refinance through any participating lender--so once the guidelines are announced borrowers can start shopping.

The new plan is available to homeowners in all 50 states, but specifically geared toward easing a tanked housing market in Arizona, California, Florida, Michigan and Nevada says senior analyst Greg McBride with

So if you are a homeowner who owes $100,000 on your current mortgage but now it’s worth only $50,000, new HARP is ripe for you. Old HARP would not have been able to help because of the 125% LTV ratio. With that cap gone, more sinking homeowners may be saved.

Plus with rock-bottom rates like 3.99% for a 30-year mortgage or 3.3% for a 15 year; borrowers who seek refinancing are going to save a decent amount. Mortgage lenders are urging borrowers to begin the process soon as demand may soar in the coming weeks.





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