A government plan to help underwater homeowners refinance to lower mortgage rates may be getting new life.
The Obama administration created the Home Affordable Refinance Program (HARP) in an attempt to help more homeowners lower their monthly payments and provide stability to the ailing housing market. But the program was hardly a booming success.
Why the original refi program fell flat
The original refi program was supposed to target underwater homeowners--those who owed up to 125 percent of their home's value on a Fannie Mae or Freddie Mac loan. Yet almost none of the refinances completed under HARP actually went to underwater borrowers. Mortgage lenders used the program to refinance their best borrowers, that is, those who could have refinanced anyway and taken their business elsewhere.
Here are three big reasons why the original HARP program fell flat:
- Participation was voluntary for mortgage lenders. Lenders were not required to participate, and even those who did pushed underwater borrowers to the backburner in favor of easier and more profitable traditional refinances. Mortgage servicers saw little reason to trade home loans with higher-than-market interest rates for mortgages with lower interest rates.
- Mortgage insurers would not write new policies. Mortgage insurance companies were not willing to insure underwater mortgages, so the only way these underwater borrowers needing mortgage insurance could refinance was to do it through their current lenders. If their existing lender didn't wish to refinance them, they were out of luck.
- Spillover from other financial issues. Job losses, pay cuts and credit problems made it impossible for many homeowners to qualify for a new mortgage. These borrowers couldn't refinance even if they managed to pay their mortgages as agreed.
What the expanded refi program does
Here's how key expanded rules will mean HARP may reach more borrowers this time around:
- The 125 percent loan-to-value maximum is eliminated. Borrowers who are deeply underwater will now be eligible.
- Risk-based pricing adjustments are lowered. Mortgage costs for those refinancing under the expanded HARP will be reduced.
- Lender liability (called "reps and warranties") is reduced. This change isn't one that many homeowners will care about, but it tackles one of the key reasons lenders had been reluctant to refinance high-risk home loans: the possibility of being sued by mortgage bond investors for underwriting new loans improperly.
These changes should allow, for example, an underwater homeowner paying a 30-year fixed mortgage rate of 5.7 percent to obtain refinanced mortgage rates of about 4 percent. With a $250,000 home loan, that translates to savings of about $200 a month. (Use a mortgage calculator to see how big an effect a lower refinance rate might have on your monthly payment.)
Mortgage lenders received guidelines for refinancing under the new HARP on November 15, 2011. The new program means borrowers won't have to go hat-in-hand to their current lender--instead, those lenders who retool their processes the fastest will be competing for business.
Who won't benefit from the new expansion
Even with the newly expanded rules, not everyone will be allowed to refinance, even if they have a Fannie Mae or Freddie Mac loan. These unfortunate homeowners include those who bought their homes with mortgages newer than May 31, 2009, borrowers who have been late on payments in the last six months, those with lender-paid mortgage insurance and those who already refinanced through HARP.
If you have a second mortgage, you may still qualify for a HARP refinance, but your second lender will have to agree to subordinate its lien to that of the newly refinanced mortgage, which is far from certain.
3 steps to jump-start your HARP refinance
If you are interested in refinancing under the expanded HARP, here's how to start:
- Make sure your mortgage is owned by Fannie Mae or Freddie Mac by checking their loan lookup tools.
- Get your income documentation and account statements together.
- Start your research by comparing refinance lenders online.
It's early to tell whether the government has finally hit the mark with this expanded version of HARP. As the expanded HARP 2.0 gets underway with lenders through the next months, it'll become evident whether many of the hurdles presented by HARP 1.0 have been addressed.