Tuesday, October 8, 2013

Harp 3.0 ready to go?

Momentum behind so-called "HARP 3.0" is now gaining steam. If the program comes to pass as part of the White House's A Better Bargain for Responsible Homeowners, here are four potential changes HARP 3 may include.

HARP Change 1 : Refinance Alt-A, Subprime Loans Via HARP

In today's mortgage market, Fannie Mae, Freddie Mac, and the FHA control more than 90% of all new mortgage origination. However, this wasn't always the case.
Last decade, non-government mortgage lenders commanded a large share of the mortgage market and Alt-A mortgages were among the most common loans they made.
Alt-A mortgages were typically referred to in acronym or shorthand :
  • SISA loans (Stated Income, Stated Assets)
  • SIVA loans (Stated Income, Verified Assets)
  • Lo-Doc loans (Low Documentation Loans)
  • No-Doc loans (No Documentation Loans)
Despite high profile default rates, there are still large numbers of "performing" Alt-A loans with Alt-A homeowners who are underwater and unable to refinance via HARP like their conforming homeowner peers.
The same is true for sub-prime borrowers who are similarly locked up.
The case for opening HARP 3 to Alt-A and subprime borrowers becomes especially clear when we consider that the 30-year fixed rate mortgage was cheaper from non-government lenders in 2005 than via Fannie Mae or Freddie Mac. Large numbers of "prime" homeowners used sub-prime loans in 2005 because the mortgage rates were cheaper.
Today, those homeowners are without ability to refinance.

HARP Change 2 : Allow Multiple HARP Refinances

Since HARP was first announced in 2009, the average 30-year fixed rate mortgage rate has dropped close to two percentage points. However, the slide below 4 percent has been a slow one.
Rates were in the 5s in 2009 and 2010; in the 4s in 2011; and in the 3s in 2012 and 2013.
As mortgage rates have dropped, hundreds of thousands of non-HARP U.S. homeowners have refinanced multiple times, lowering their respective mortgage payments up to 40 percent over the years.
HARP homeowners, on the other hand, have not been afforded this right.
The HARP mortgage guidelines state that the program may only be used one time per household. Therefore, underwater homeowners who immediately used HARP to refinance in 2009 have been unable to refinance again via HARP as rates have kept dropping.
This one-use restriction takes on added significance since the Federal Reserve launched its third round of qualitative easing (QE3) in September 2012, a program through which the nation's central banker aims to lower U.S. mortgage rates as far as possible.
Today's mortgage rates are near 4.25%. Meanwhile, homeowners who HARP-refinanced in 2009 to 5.50% are unable to "re-HARP" to something better .
Should HARP 3 pass, it could implement a feature of the popular FHA Streamline Refinance program -- it could give homeowners program-eligibility after 6 payments have been made to the bank. Until then, HARP is one-use only.

HARP Change 3 : Change Cut-Off Date From May 31, 2009

Another HARP 3 change that could put the Home Affordable Refinance Program within reach of more people would be a change in the program's cut-off date.
Currently, HARP's eligibility standards require all HARP-refinanced mortgages to have been securitized by Fannie Mae or Freddie Mac on, or prior to, May 31, 2009. This is because -- according to a Fannie Mae representative -- homeowners whose mortgages come from after this date knew what kind of housing market into which they were buying.
The inference is that HARP was conceived to help homeowners who didn't know any better.
Even so, among the homeowners who did know better, and still bought a home post May 31, 2009, the spirit of the HARP program should still apply. Many of these homeowners made 20% downpayments and those downpayments have since been lost to the housing downturn.
To help make HARP more uniform nationwide, HARP 3 could be extended to include homeowners refinancing a primary residence for which the mortgage was securitized post-May 31, 2009. There are many homeowners with mortgages from 2010 who may benefit from a HARP 3 refinance.

HARP Change 4 : Allow HARP Loan Sizes Up To $729,750

The fourth change that should be included in the HARP 3 refinance program is an allowance for "high-balance" loans in designed high-cost area.
First, some background.
Each year, the government releases its mortgage loan limits for Fannie Mae- and Freddie Mac-conforming loans. These figures that represent the maximum-sized loan that the government groups will agree to securitize. Loans which are in excess of these maximum loan limits are called "jumbo" loans.
Since 2006, the conforming loan limit for 1-unit homes has been $417,000. However, in 2009, as part of an economic stimulus plan, areas in which homes were deemed "expensive" were assigned a temporary conforming loan limit increase to $729,750 which was to last until September 30, 2011.
For two-plus years, therefore, home buyers in areas including Orange County, California; New York, New York; and Loudoun County, Virginia could finance up to $729,750 and still be within the maximum loan size limits for Fannie Mae and Freddie Mac.
Then, in October 2011, the loan limits dropped.
Homeowners in high-cost areas could no longer finance up to $729,750 with a conforming mortgage -- the limit was dropped to $625,500 -- leaving everyone in no-mans land whose conforming mortgage was started between 2009-2011 and which the remaining balance exceeds $625,500.
Furthermore, 2014 conforming loan limits are expected to be even lower.
To remedy this issue, again, HARP 3 can take a page from the FHA Streamline Refinance playbook. So long as the original loan size was within conforming loan limits at the date of original closing, and so long as the refinance doesn't include "cash out", the loan size could be approved as-is.
This change could apply to non-HARP 3 homeowners, too.

Get Ready To Move Quickly On HARP 3

It's unclear whether HARP 3 will pass via congressional mandate, or via the FHFA, but many insiders believe it HARP will pass soon. The White House continues to push for it using the #MyRefi brand name and the program has been included in the President's Better Bargain for U.S. Homeowners program.
When HARP 3 passes, it will help millions of additional U.S. households get access to today's low mortgage rates. HARP 2 made grand improvements over the original Home Affordable Refinance program. HARP 3 will likely do the same.

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