Photo: Jeff Turner / Flickr
Ever since President Obama said he will work with federal housing agencies to help more people refinance at today’s low mortgage rates, there has been much speculation about what form this additional assistance would take.Most of the speculation has focused on possible changes to the Home Affordable Refinance Program (HARP).
Announced in March 2009, HARP was designed to help 5 million underwater homeowners refinance into a fixed loan with a lower monthly payment. However, in the two and a half years since its inception, only 838,000 homeowners have been able to refinance.
This is fewer than expected because certain features of the program reduce the number of people who can actually benefit from it. If any changes are made to the program, these are the features likely to be amended:
Loan-level pricing adjustments (LLPAs)
LLPAs are lender-implemented fees that can increase the cost of refinancing based off of a borrower’s presumed risk of default. These fees come in the form of higher discount points paid up front or a higher rate paid over the life of the loan and can be so expensive, the homeowner decides it’s not worthwhile to refinance. Lenders use LLPAs all the time (not just for HARP) but critics suggest the fees being used for HARP are too high.
Some borrowers have borrowed against their home more than once. The most common scenario is when a borrower takes out a standard first mortgage (also called a first lien) and later takes out a second mortgage or home equity line of credit. If a borrower with two liens goes into foreclosure and the property is sold via foreclosure, the owner of the original mortgage gets paid first, and if there is money remaining, the second mortgage holder gets paid.
Even though the second lien holder is second in line to get paid, they can still block a refinance of the first lien from happening by refusing to keep their “second place” in the payment line. In the current HARP program, owners of the second liens are not obligated to agree to a refinance of the first lien and some are refusing to do so, essentially blocking the refi from happening.
Mortgage insurance (MI)
Lenders require borrowers to take out mortgage insurance on loans originated with a loan-to-value ratio (LTV) of over 80%. If you’re trying to do a HARP refinance and you already have MI on your current loan, you still need to obtain new mortgage insurance, often at a higher cost than what you already pay. This means the borrower saves less money each month from the refinance. Worst still, even if the borrower wanted to do the HARP refinance with the higher MI cost, some mortgage insurers won’t insure the new loan.
Maximum loan-to-value ratio (LTV)
Although HARP permits underwater homeowners to refinance if their LTV (the ratio of how much you owe on your loan to how much your home is worth) is up to 125%, home values in many areas have fallen so far that even the 125% ceiling is not high enough for many consumers to qualify. Many people are starting the application process for a HARP refinance only to find out that they owe more than 125% of the current value of their home so they cannot qualify for the HARP refinance.
Whether the Federal Housing Finance Agency (FHFA) will remove any of these so-called roadblocks is still an open question, but it’s something to watch closely.