Monday, October 24, 2011

A few comments on the HARP Refinance Program changes

by Bill McBride on 10/24/2011 04:38:00 PM

Here is the press release from the FHFA: FHFA, Fannie Mae and Freddie Mac Announce HARP Changes to Reach More Borrowers

• One of the key elements is the elimination of seller and servicer reps and warrants on these loans. Several readers have asked if that is a "gift" for the originators?

It is definitely a plus, but these are seasoned loans (the loans had to be originated before May 2009), so the borrower has been making payments for several years. From the FHFA:

Nearly all HARP-eligible borrowers have been paying their mortgages for more than three years, and most of those for four or more years. These are seasoned loans made to borrowers who have demonstrated a capacity and commitment to make good on their mortgage obligation through a period of severe economic stress and house price declines.

Reps and warrants protect the Enterprises from losses on defective loans; typically, such defects show up in the first few years of a mortgage and so the value of the reps and warrants decline over time. By refinancing into a lower interest rate and/or shorter term mortgage, these borrowers are recommitting to their mortgage and strengthening their household balance sheet, thereby reducing the credit risk they already pose to the Enterprises. Therefore, FHFA has concluded that eliminating the reps and warrants that may have discouraged industry participants from taking greater advantage of HARP to-date will be good for borrowers, housing markets, and the Enterprises and taxpayers.
This will hit some MBS owners since these borrowers will now be able to refinance and the previous loan will be paid off (and these borrowers were paying high interest rates).

• Some readers have pointed out this doesn't help with negative equity. However there is an attempt in this program to get borrowers to refinance in to shorter term loans - and by paying down the loan amount - the borrowers will reach positive equity sooner. But this doesn't reduce the loan balance.

• I suspect this will encourage some short term delinquent borrowers to bring their mortgage loans current. From the FHFA: "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." So some 30 day delinquent borrowers could refinance in 6 months - and many in a year if they can bring their loan current. Mortgage rates will probably still be pretty low in a year!

• The FHFA estimates this will help close to 1 million borrowers, but according to a Dow Jones report, analysts at Barclays Capital have estimated that between 1.9 million and 3.1 million homeowners will be eligible.

• All of the major lenders have agreed to automatically subordinate their second liens behind the new HARP loans. This makes sense - a lower payment on the first helps the 2nd lien - but under the old program this had to approved on a loan by loan basis.

This program will probably be more successful than the original HARP. Of course this doesn't help delinquent borrowers - or borrowers with loans not guaranteed by Fannie or Freddie. Frequently loans are sold to Fannie or Freddie and the borrower keeps paying the servicer and isn't aware that the loan has been sold. Anyone with a loan originated before May 2009 should probably check:
Homeowners can determine if they have a Fannie Mae or Freddie Mac loan by going to:
http://www.FannieMae.com/loanlookup/ or calling 800-7FANNIE (8 am to 8 pm ET)
https://ww3.FreddieMac.com/corporate/ or 800-FREDDIE (8 am to 8 pm ET)