Harp 2.0 offers a new way to refinance
Another day, another attempt by the federal government to resolve the never ending housing crisis. Is it just more smoke and mirrors or does this latest refinance program have enough teeth to finally take a bite out of the real estate downturn apple?
On Monday, Oct. 24, the Obama administration announced its plan to revamp the existing Home Affordable Refinance Program, which has been in effect for two years. The new plan, dubbed HARP 2.0, is hoping to offer the oversupply of homeowners who are unable to refinance a way to do so.
The overhauled plan will allow borrowers to refinance regardless of how far their homes have fallen in value. This eliminates previous limits based on the amount of equity in the home and presumably will open up refinancing to those previously boxed out. For example, there are millions of homeowners who are paying higher interest rates than are currently available, but are underwater, owing more than their houses are worth and who would not otherwise qualify for refinancing.
In addition, the plan will reduce or eliminate bank fees for refinancing and streamline the process. Since the appraisal process is currently one of the biggest problems in getting a property to qualify for refinance, that step is being eliminated, as well as much of the extensive underwriting requirements. Homeowners need to be current on their previous six mortgage payments and also must have mortgages that were backed by Fannie Mae and Freddie Mac. The program is open to those owing up to 125 percent of their home's value.
The new plan has the potential of helping homeowners benefit from a lower interest rate, 4.11 percent for a 30-year, fixed-rate mortgage as of this writing, who have basically good credit and would typically qualify for a refinance, but cannot because their home is underwater. The administration's position is that helping this group of homeowners will result in eliminating future foreclosures by putting more money in the pockets of homeowners and discouraging strategic defaults. It, of course, does nothing for homeowners who are currently delinquent on mortgages or mortgages that are not backed by Fannie and Freddie.
One of the major obstacles to the program's success is getting the banks to refinance negative equity properties. It's unlikely that Congress can or will mandate that lenders cooperate, not to mention the possible negative impact to investors who purchase mortgage backed securities.
The final details including costs will not be published until mid-November with lenders starting to refinance loans as soon as Dec. 1. The program's expiration date is the end of 2013, extended from the original of June 2012. Early next year the current limit of 125 percent of the property's value will be lifted, allowing homes that are even further underwater to qualify for a refinance.
Since the country has never really lived through this type of housing downturn, everything the government tries is pretty much an experiment. In previous real estate downturns, just lowering the interest rates would prop up the economy by freeing up cash to those who refinanced. However, because of all of the underwater homes and homeowners' inability to qualify for mortgages, it doesn't seem to matter how low the rates fall.
Is it too little, too late as many in the mortgage industry feel or is it the silver bullet that will finally hit its target? All we know for sure is that it's another day and another plan.