HARP didn’t work the first time and it’s not going to work now.
An article in Banker and Tradesman, Lenders: HARP Re-Do Faces Same Pitfalls as Original Program, outlines lender reluctance to participate in the HARP Program as one of the main reasons it won’t work. This article spells out why it won’t work better than any other article we have seen. In the article, a local mortgage broker says, “Why would Wells want to start servicing a loan that Chase has been servicing if it’s dramatically underwater?”
He could not be more right about that. Loans that are underwater are far more likely to become delinquent and the last thing these big banks need is more delinquent loans that cause them a lot of trouble. In November Massachusetts Attorney General Martha Coakley filed a lawsuit against five major banks for deceptive loan servicing and pursuing illegal foreclosures.
The HARP Program will not help homeowners whose mortgage originated prior to June 2009, and it won’t help people facing foreclosure. It has all the right intentions but it just won’t work.
The revised Home Affordable Refinance Program, also known as “HARP 2.0,” took effect on December 1, 2011, and allows qualified borrowers to take advantage of low interest rates. Approximately 890,000 homeowners have used HARP to refinance their mortgages since the program started in 2009.
The previous version of HARP only assisted homeowners with a loan-to-value (LTV) ratio of between 80% and 125%. An LTV ratio shows you how much of your home is being financed. You calculate your LTV by dividing the loan value by the value of the home. For instance, if your home is worth $100,000 and your loan is $80,000, then your LTV ratio is 80%.
Most homes have lost value since the mortgage crisis which made them ineligible for a typical refinance or even the previous version of the HARP program.
Now homeowners who owe more than 125% of their home’s value are eligible for HARP 2.0. Other eligibility requirements include: the mortgage must be owned by Fannie Mae or Freddie Mac and you must be current on their mortgage payments with no late payment in the past six months.
Problems with HARP 2.0
Even with Fannie Mae or Freddie Mac guaranteeing the loan, lenders may impose their own stricter additions, known as “overlays,” to the guidelines. They do this in an effort to decrease the amount that will get approved because they simply do not want them.
HARP allows lenders to refinance mortgages that are being serviced by a different company and most banks would rather stick with loans they own. No bank wants more underwater loans. Some borrowers may only be able to qualify for HARP by going to their current mortgage servicer, rather than shopping around for the best rate. This makes it much more challenging for homeowners. And since the program is voluntary, some lenders won’t even participate in the HARP Program.
Lenders must include warranties in the loan contracts concerning the quality of the loans they sell to Fannie Mae and Freddie Mac. If the loans go into default, Fannie Mae and Freddie Mac can force the lenders to buy them back. They’re much more cautious about agreeing to service loans that will be underwater and more likely to go into default.
So in order to protect themselves, lenders will make additional guidelines to HARP, which will make it much more difficult for homeowners to get their loans refinanced.
The revised HARP Program won’t work because even if your lender participates in the program, their requirements for eligibility may differ from the program’s initial guidelines and may be stricter, which means you may not even be able to take advantage of the program.
It doesn’t solve the problem of your home being underwater even if you do qualify for the program. HARP doesn’t reduce the mortgage principal, so even after successfully refinancing, the home will still be underwater.
For more information on this story see Lenders: HARP Re-Do Faces Same Pitfalls as Original Program
Do You Qualify?
With all due respect, there are some factual errors in this article. Under HARP 2.0, LLPA’s (loan level pricing adjustments) aka “overlays” are capped at 75 basis points. In short, this means that the effect of lender overlays on the delivered interest rate (i.e., “price hits”) will be limited. Said another way, the LLPA cap will allow many borrowers to receive an interest rate low enough to objectively justify proceeding with a refinance under HARP 2.0.
Most importantly, the article hereto states:
“Lenders must include warranties in the loan contracts concerning the quality of the loans they sell to Fannie Mae and Freddie Mac. If the loans go into default, Fannie Mae and Freddie Mac can force the lenders to buy them back. They’re much more cautious about agreeing to service loans that will be underwater and more likely to go into default.”
The above statement is not accurate. Under HARP 2.0 (loans submitted via “DU Refi Plus”), reps & warranties provisions have been waived in most cases. This is arguably the most significant component of HARP 2.0 and it reasonably increases the likelihood of lender participation in the HARP 2.0 Refi Program. For specific details, see Fannie Mae Excerpt from Selling Guide, B5-5.1-05, DU Refi Plus and Refi Plus Eligibility (12/13/2011).
Furthermore, the “Borrower Ability to Pay” clause has been eliminated which makes HARP 2.0 even more attractive to lenders.
“The elimination of this clause takes away many of the remaining concerns regarding rep and warranty indemnification in terms of HARP refinancings, analysts said. Lenders can now underwrite HARP loans looking at borrower credit based on a more straightforward standard – number of payments made. This considerably lessens the complexity in terms of the rep and warranty liabilities for these loans, Barclays analysts said….The removal of the subjective ‘ability to pay’ criteria could result in lenders becoming more comfortable with the potentially lower indemnification liabilities. This could lower the threshold for refinancing loans and lead to a boost in refis.”
Kurt thank you for your comments I appreciate you noticing our post. Time will tell who is right and who is wrong. We have spoken extensively to numerous mortgage brokers and we posted the feedback that we have gotten and we highlighted this Bank & Tradesman Article because we feel it sums it up very well. We shall see how it works out. I feel strongly that the program will for the most part continue to be a failure.
Here is another good article where they interviewed one of the lobbyist of HARP 2 http://dailyproperties.com/harp2-harp-2
This recent article in HousingWire cites the same reasons we outlined in January on why HARP won’t work: lenders are imposing their own stricter additions to HARP guidelines and some lenders won’t even participate in the program.
http://www.housingwire.com/news/harp-20-fails-deliver-refinancing-fireworks-march