New federal guidelines should allow a million or more homeowners to refinance

I still have my doubts about any federal efforts to help the housing market, but I am impressed by the planned expansion of the Home Affordable Refinance Program (HARP), detailed today by the Federal Housing Finance Agency (FHFA).

Those who think they might be affected should read the press release and then talk to their lenders.

In theory, the “enhanced” HARP should open the door for mortgage holders whose notes are backed by Fannie Mae or Freddie Mac and who are current on their payments to refinance at the current low rates, no matter how far underwater they are.

Among the key elements of the expanded program (quoting from the press release):

  • Eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers;
  • Removing the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac;
  • Waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac;
  • Eliminating the need for a new property appraisal where there is a reliable AVM (automated valuation model) estimate provided by the Enterprises; and
  • Extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009.
Reducing fees, that’s good. Removing the LTV (loan to value ratio), that’s good. Eliminating the need for new appraisals in many cases, that’s good too.
Here are the general rules regarding eligibility:
  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009.
  • The current loan-to-value (LTV) ratio must be greater than 80%.
  • The borrower must be current on the mortgage at the time of the refinance, with no late payment in the past six months and no more than one late payment in the past 12 months.
That last criterion is interesting. Some delinquent borrowers who might be considering a strategic default might choose to get current on their payments so that they can refinance in less than a year, when it seems certain that interest rates will still be low.

No, the enhanced HARP does not reduce principal, but encouragement to reduce the terms of mortgages could result in more homeowners reaching positive equity more quickly. Here’s a hypothetical case in the FHFA press release:

  • Assume a homeowner currently has a mortgage on which he or she owes $200,000 and has an interest rate of 6.5 percent – a monthly payment of $1264. If the house is worth $160,000, the homeowner has a current loan-to-value (LTV) ratio of 125 percent.
  • If this borrower refinanced into a 30-year fixed-rate mortgage with an interest rate of 4.5 percent, the monthly payment would decline to $1013. But, by refinancing into a 30-year loan, the borrower’s loan balance will not reach $160,000 for ten full years.
  • If the borrower chose a 20-year loan term at a rate of 4.25 percent (mortgage rates tend to be less for shorter term mortgages), the monthly payment would be $1238 ($26 less than the borrower currently pays) and the borrower’s loan balance would reach $160,000 in five-and-one-half years.
  • If this same borrower refinanced into a 15 year mortgage, assuming an interest rate of 3.75 percent, the monthly payment would be $1454 ($190 more than the current payment), but the loan balance would be below $160,000 in a bit more than three-and-one-half years.
I’ve already seen a poorly written piece in the Washington Post (which also had a poorly written piece in the paper yesterday about the impending announcement from FHFA) that talks about an example of “only $26” a month being saved. That’s obviously a gross oversimplification of the hypothetical example above.
For a more detailed discussion, check out this post by Calculated Risk.
This amounts to really good news, but we will almost certainly need to see some other big steps to boost housing, and it would sure be good if there were a way to extend this program to mortgages that are not backed by Fannie or Freddie.