Tuesday, June 12, 2012

Report: HARP 2 Refinancing activity increases

by Calculated Risk on 6/12/2012 11:43:00 AM

From Kathleen Pender at the San Francisco Chronicle: Harp 2 starts to help the severely underwater

On June 1, the Federal Housing Finance Agency reported that total Harp refinances had jumped to 180,185 in the first quarter of this year - almost double the number done in the previous quarter.
...
The vast majority of Harp refis in the first quarter were loans with LTV ratios in the 80 to 105 percent range. Guy Cecala, publisher of Inside Mortgage Finance, calls these loans the "low-hanging fruit lenders have been willing" to refinance.

Only 20 percent had LTVs between 105 and 125 percent and only 2 percent had LTVs greater than 125 percent.
...
Starting last week, loans with LTVs greater than 125 percent can be bundled into securities sold to investors, although they still must be segregated from other loans, Cecala says. That should give Harp 2 a big boost.

One obstacle for borrowers is that most big banks, including Bank of America and Chase, won't refinance a loan under Harp 2 unless they already service it.
HARP 2 doesn't always lead to lower payments - one of the goals of the program was to get borrowers to pay down principal faster with a shorter amortization period. This will help borrowers get out of a negative equity situation sooner. Here is an example from the article:
Oliver and his wife owed $372,000 on their home, now worth about $230,000. With a loan-to-value ratio of 161 percent, Oliver had little hope of refinancing his 5.875-percent mortgage ...

The Olivers had only 21 years remaining on their original mortgage, so rather than refinance into a new 30-year loan, they took out a 15-year loan at 3.5 percent with no closing costs.

"We will be paying roughly $300 more per month, but we are saving $171,000 over the course of the loan," says Oliver, who closed a few weeks ago.
A quick calculation: if the house value stays at $230,000, the borrowers would be out of negative equity around June 2023 with the current loan. With the new loan they will be out of negative equity at the end of 2018 (still a long time, but they have quite a bit of negative equity).