FHFA Announces Redesigned HARP to Help Underwater Borrowers

Homeowners who are strapped with loans that are more than their homes are worth may be able to get some help for their traditionally hard-to-refinance underwater mortgage.

The Federal Housing Finance Agency on Monday announced changes to the Home Affordable Refinance Program (HARP) for loans backed by Fannie Mae and Freddie Mac. With input from lenders, mortgage insurers, and other mortgage participants, the agency has redesigned HARP in an effort to attract more borrowers that can benefit from mortgage restructuring.

“We know that there are many homeowners who are eligible to refinance under HARP and those are the borrowers we want to reach,” said FHFA Acting Director Edward J. DeMarco.

DeMarco said the changes will make the program accessible to more borrowers “while reducing risk for Fannie Mae and Freddie Mac and bringing a measure of stability to housing markets.”

To qualify, homeowners must be current on their mortgage with no late payments in the past six months and no more than one late payment in the past year. This eliminates many borrowers who have been affected by the dismal job situation.

A key aspect of the new program is to remove the current 125 percent loan-to-value ratio ceiling. Also, risk-based fees will be eliminated for borrowers refinancing into shorter-term loans, and fees for other borrowers will be reduced as well.

These changes are intended to help homeowners who are underwater refinance into shorter-term loans at today’s lower interest rates. By taking a shorter-term loan, the total amount of interest paid over the life of the loan is dramatically cut, and the borrower pay off their home and be free from the burden of a mortgage much sooner.

And while going from a 30 year mortgage to a 15 year mortgage usually meant a dramatically higher mortgage payment, in this current situation it might not be a severe increase. Rates are much lower now, and hopefully the borrower has paid down some of that principal if they've at least owned the home for several years.

For example, say a borrower took out a 30 year loan for $125,000 at 6.5%, the prevailing rate in 2007 just before the recession started and when rates were recently higher. Principal and interest payments would be $790 a month, and the loan would cost an additional $159,400 in total interest by the time the home is paid off in 2037.

If the loan payments were kept up-to-date for four years by this same borrower, the current loan balance should be about $116,000. This balance could be refinanced into a 15 year mortgage at 3.5%, the current average rate for this loan term - for a monthly mortgage payment of $829 and $33,270 in total interest by the time the home is paid off in 2026. Wow.

For simplicity, this example leaves out other important monetary considerations such refinance costs, taxes, and insurance - but the evidence is there for how a shorter loan term, a lower interest rate, and a smaller loan amount may help a homeowner benefit from the new plan.

Bob Nielsen, chairman of the National Association of Home Builders (NAHB) said in a statement, "Making more borrowers eligible for refinancing their mortgages by enhancing the Home Affordable Refinance Program (HARP) will give a badly needed boost to consumer confidence. Enabling additional home owners to take advantage of today's low mortgage interest rates in cases where their loans are greater than the value of their homes will give some households more money to spend on other things and enable others to at least pay their mortgages off at a faster rate."

But Nielsen also expressed concern for the many homeowners who won't qualify for HARP because they've fallen behind on their loans. "Clearly, additional policy initiatives are urgently needed to prevent foreclosures and deal with the inventory of foreclosed homes," he said.

It’s estimated that nearly 11 million Americans are underwater on their mortgages - a result of the easy credit, no-down-payment days that were a significant contributor to the economic disaster we have yet to recover from. But because most of these troubled homeowners have already missed mortgage payments, it's estimated that only about 900,000 borrowers would actually benefit from the revamped HARP.

Nielsen continued, "In addition, it is essential to address overly restrictive mortgage lending standards, inappropriate credit limitations on home builders and a broken appraisal system that is contributing to housing price instability. All of these factors are detrimental to the full-scale housing recovery we need to rally consumers and get a disappointing economic recovery moving forward."

Today in Las Vegas, President Obama will outline the steps being taken by the FHFA while kicking off a new effort to encourage Congress to pass the rejected American Jobs Act, piece-by-piece. Using the mantra “we can’t wait,” the President will highlight executive actions that his administration will take. And later this week, Obama plans to announce efforts to help graduating students deal with their student loans.


Sources:
Federal Housing Finance Agency
The White House
National Association of Home Builders
Bankrate mortgage calculator and amortization schedule