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Refinancing Programs Fail to Help Homeowners Significantly Underwater

Written By:
July 31, 2012 at 1:09 AM

Refinancing Programs

Mark Zandi, the chief economist at Moody’s Analytics, estimates that as many as two-third of U.S homeowners have home mortgages with interest rates 5% or higher. Zandi, speaking before a Senate Banking Committee, said, “Millions of U.S. home owners should be refinancing, significantly cutting their monthly payments.”

He went on to say that refinancing to lower rates would help households financially and the overall economy in general. According to Zandi, to provide an opportunity for homeowners and “facilitate more refinancing presents one of the most “effect and straightforward” strategies for a housing market recovery.

More Borrowers Helped By Program Revisions

More homeowners have been successful in refinancing their home loans since major revisions to the Home Affordable Refinance Program (HARP) a few months ago. For example, DeVeau Dunn, an independent filmmaker who resides near San Diego, tried unsuccessfully to refinance his mortgage last year. However, because he owed more on his loan than the market value of his home, the bank would not approve Dunn’s mortgage application.

Revisions in the federal program (HARP 2.0), which include the elimination the 125% loan-to-value (LTV) ratio, helped Dunn qualify for mortgage refinancing. Mortgage lenders also receive a release from liability on loans refinanced under the HARP mortgage program. This modification to policy eliminates mortgage lenders’ fear of having to buy back bad loans.

Dunn’s new loan, secured at an interest rate of four percent, reduced his monthly mortgage payment by $700. His annual savings of $8,400 far exceed the $3,000 average annual savings homeowners who refinanced would realize as presented by President Obama in his 2012 State of the Union address.

Underwater Mortgage Programs Have Limited Effect

A loan officer at Cincinnati’s Waterstone Mortgage Dan Green said, finding a mortgage lender to underwrite loans based on the governments guidelines have proved difficult. Green says a “disconnect” exist between the advertisement and promotion of the programs and the experiences of homeowners who unsuccessfully apply for home mortgages.

The HARP program, which originally went into effective in early 2009, had the mission of helping about 4 million homeowners. Borrowers must have home loans insured by Fannie Mae or Freddie Mac before May 31, 2009 to meet the initial eligibility requirement. Currently, about 1.3 million borrowers have refinanced their mortgages through HARP.

Along with revising the HARP mortgage program, the Federal Housing Administration (FHA) also reduced fees borrowers must pay to refinance their mortgage under the FHA streamline refinance program in the hope of stimulating refinancing activities. Along with lower fees, the FHA streamline refinance program allows for less stringent underwriting by removing the need for appraisals or income verifications. Borrowers must have FHA-insured loans and current mortgage payments.

Lenders Ultimately Determine If Borrowers Meet Criteria

Despite the changes to federal guidelines for mortgage refinancing, many mortgage lenders continue to require borrowers to have high credit scores and recent appraisals, as reported by numerous housing industry analysts. Borrowers who have home mortgage balances significantly higher than the value of their homes continue t have their applications rejected by lenders.

One mortgage broker said a number of his clients owed from 50 to 80 percent more than the market value of their home. He said, very few lenders have shown a willingness to fund these loans. Approximately 4 percent of borrowers with LTVs over 125% have refinanced their mortgages under HARP 2.0.

Mortgage lenders have also stifled any competition for borrowers by choosing only to refinance mortgages held by existing customers. Lenders such as Wells Fargo, JP Morgan and Bank of America claim they do not have the staff necessary to keep up with refinancing demand. Since banks will only service their own customers, borrowers cannot shop and compare refinancing options.

In a mid-July press release, the Federal Housing Finance Agency’s acting director Edward DeMarco reports that mortgage refinance approvals for HARP 2.0 have exceeded the total amount of approvals for all of 2011. With 78,273 mortgage refinances completed, DeMarco said HARP 2.0 “is accomplishing goals set forth.” A spokesperson for FHA said the streamline refinance program continues to exhibit “strong interest.”





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