Home Affordable Refinance Program: A lifeline to 'underwater' borrowers?

Home Affordable Refinance Program did not reach as many borrowers as officials had hoped. By including 'underwater' loans, the Obama administration hopes to stem the tide of foreclosures.

The Federal Housing Finance Agency will now make it easier for some Americans who are “underwater” on their homes to refinance them at today’s eye-popping low rates.

Yes, homeowners, who have diligently made their monthly payments but have relatively expensive mortgages of 6 or 7 percent, may now be able to join Americans who are paying 4.25 percent or less for a 30-year fixed-rate loan.

Until now, most banks would not refinance a loan if it was “underwater” – the house was worth less than the amount mortgaged. Owners of such homes could merely fantasize how much easier it would be on their monthly budget if they could lower their mortgage payment.

Now borrowers whose loans were purchased by Fannie Mae or Freddie Mac on or before May 31, 2009, might be eligible to refinance under the Home Affordable Refinance Program (HARP) as long as they are current on their mortgage and have had no late payments for the last six months. The new rules would start to go into effect on Nov. 15th and would apply no matter how much the homes have shrunk in value.

The changes are part of an effort by the Obama administration to slow the avalanche of foreclosures. Administration aides reason that if homeowners have lower payments, there will be fewer foreclosures which will also help to stabilize home prices.

“Clearly refinancing is a key focus for President Obama this year,” Gene Sperling, director of the National Economic Council, said at a press briefing on Monday.

President Obama was announcing the program in Las Vegas at a private residence Monday afternoon. However, both the Federal Housing Finance Agency (FHFA) and HUD Secretary Shaun Donovan briefed reporters earlier in the day.

Mr. Donovan said it was difficult to say how many Americans might take advantage of the changes in the program. Under the original program, which was initiated under President George W. Bush in 2008, fewer than 1 million homeowners refinanced their houses.

“It did not reach the scale we had hoped and the scale we need to reach,” said Donovan. To try to get more people eligible for refinancing, FHFA agreed to waive many fees and the need for a new appraisal.

One key feature is Fannie and Freddie will assume all the risk for loans that go into default except for those involving fraud. Recently, Fannie and Freddie have been forcing banks to take back mortgages.

“There is way too little competition and incentive to compete, to help families refinance, and one of the reasons is because lenders fear the mortgage may be coming back to them,” said Donovan.

How much the adjusted program would cost the US government is unknown, but if borrowers default on the refinanced loans, the taxpayers will absorb the loss.

Housing experts say, however, that they view the changes as generally positive.

“I am not sure this isn’t more an incremental step than a leap forward,” says John Taylor, the president of the National Community Reinvestment Coalition, a lobbying group in Washington. “But, it will be helpful.”

Mr. Taylor suggests the administration look at the revised HARP in three months to see if more changes will be needed. “We cannot afford another year of 1.5 million to 2 million more foreclosures,” he says.

Taylor says if the changed HARP does not allow more people to refinance, he thinks Fannie Mae and Freddie may have to eliminate even more fees, which would further lower the cost of loans. “They should stop trying to make money on this deal,” he says.

In addition, he suggests FHFA expand its pool of eligible homeowners to include those whose payments are on-time 75 percent of the time.

“You then go from a potential pool of 1 million people to a potential pool of 4 million people,” he says. “Many of those people would benefit from a lower interest rate mortgage.”

The changes will not affect people whose loan-to-value ratio is under 80 percent – in other words people who have more than 20 percent equity in their homes. However, Mr. Donovan said the administration would try to get them included as well.

For households under the 80 percent level, refinancing at today’s rates, without the fees and appraisals, could result in a savings of $2,500 a year, calculated Donovan. “That is the equivalent of a significant tax cut,” he said.