- - Wednesday, November 23, 2011

The newly revamped Home Affordable Refinance Program (HARP) appears to be moving in the right direction. Here’s an update.

HARP is a program designed to help borrowers who, although they have good credit and income, have been unable to refinance to today’s lower rates because their property values have fallen as a result of the severe downturn in the housing market. Only loans held by mortgage giants Fannie Mae and Freddie Mac are eligible.

In theory, the program makes plenty of sense. Federal Reserve Chairman Ben S. Bernanke has been successful in bringing down interest rates in hopes of encouraging refinancing and home-buying and, in turn, revitalizing the economy. The problem is, many homeowners are stuck in their homes because they have lost equity and would have to write a check at the settlement table if they sold their house.

Enter the HARP program, which basically says this: “You can refinance your home to today’s low rates as long as you are current on your mortgage and have good credit, even if you have lost home equity. Lowering your rate will lower your payment and eventually put more money back into the economy. This is what we want.”

It makes sense to me. A responsible homeowner should not be prevented from taking advantage of today’s rates because his property value has fallen through no fault of his own. The program, however, was largely a flop.

The devil lies in the details, and most homeowners who have lost equity and seemed to be HARP candidates were ineligible for a HARP loan for one reason or another. The newly revamped HARP, known as HARP II, addresses these issues.

If everything goes right, here’s what we can hope for:

  • Millions of homes that have a second trust or home-equity line of credit could not get a HARP loan previously because the bank holding the second loan would not allow a subordination. Apparently, most of the largest second-trust lenders now have agreed to automatically subordinate to a HARP refinance.
  • Existing loans that carry private mortgage insurance (PMI) couldn’t refinance to a HARP loan because the PMI company refused to transfer the PMI to the new loan. The scuttlebutt is that PMI companies now will allow the transfer.
  • The loan-to-value limit is eliminated. The original HARP program required that the loan not exceed 125 percent of the home’s current value. This rule prevented millions of homeowners in hard-hit areas, such as Nevada, from taking advantage of HARP.
  • The underwriting guidelines are to be simplified. The rumor is that if a homeowner has qualified credit and no late payments, he will be eligible for a HARP II loan. This also will reduce the cost of the loan, effectively lowering the rates further.
  • Fannie and Freddie will indemnify lenders against mortgage loan buybacks. Lenders are deathly afraid Fannie and Freddie will find some underwriting detail to make the lender repurchase a closed loan, discouraging lenders from participating in the program. Streamlined underwriting guidelines, coupled with a buyback indemnification will encourage participation from lenders and could make the refinance process less like a cavity search for the homeowner.

The new program is set to be rolled out in December. It could be a big winner — or another flop.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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