HARP 2.0: Obama’s improved refi program for underwater mortgages

A lot of homeowners with underwater mortgages have March 17, 2012 circled on their calendars. That’s the day when new rules for the federal mortgage-refinancing program known as HARP 2.0 go into effect. It’s an update to the Home Affordable Refinance Program [HARP] launched in 2009, and its new provisions could help address a big, lingering problem facing homeowners and mortgage holders.

Approximately 4 million Fannie and Freddie borrowers owe more on their mortgage than their homes are worth. Across the US, nearly 11 million are underwater, or about 22.5% of all outstanding loans,. About 2.4 million hold less than 5% equity in their homes.

HARP is for homeowners having trouble refinancing their underwater mortgages through conventional methods. If the home has a Fannie Mae or Freddie Mac loan or guarantee, the owner can apply for refinancing via HARP.

What’s new and better in HARP 2.0?

Mainly, it’s the elimination of the loan-to-value cap for fixed-rate loans. Under previous versions of HARP, to qualify for refinancing, your loan could not exceed 125% of the current value of your home. That has been a huge problem for many homeowners whose property values tanked in the collapse of the real-estate bubble. When their loan exceeded their value by more than 125%, they lost the ability to refinance. Now, if you qualify for HARP, there’s no cap, and refinancing experts are calling that development very good news for homeowners.

Another change in HARP 2.0 is the removal of the “reasonable ability to pay” clause. Previously, lenders were required to determine if there was a reasonable chance that the borrower could repay the mortgage. Lenders based this factor on information in the loan application—things like payment history and having a source of income. Often, ability to pay is measured by a debt-to-income [DTI] ratio. But under the HARP 2.0 rules that go into effect on March 17, no DTI calculation is required [and here’s a little catch to be aware of] if the borrower’s payment does not increase by more than 20 percent. Otherwise, a 45 percent DTI applies.

To a non-financial layperson, removing the ability-to-pay clause sounds like a risky move, and, indeed, requiring the ability to pay has traditionally been a way of ensuring prudent underwriting judgment. But the change appears to be a response to concerns by lenders, who, according to DS News, a website for the mortgage-refinance industry, call the now-defunct clause “vague, subjective and a legal risk in case of a default. Under the new rules, lenders can now underwrite HARP loans by assessing borrower credit based on an objective metric– number of payments made.”

The idea behind eliminating the lender’s responsibility for “reasonable ability to pay” out of the HARP refi mix appears to be to remove a hurdle that has exacerbated the current refi logjam. Is this move just another giveaway to lenders, enabling them to make more risky loans without taking responsibility? We’ll have to wait and see.

FYI: HARP basics

The March 17 HARP tweaks don’t change the basics. The goal of HARP is to allow a homeowner to get a mortgage refinance for a lower interest rate and overall monthly payment. Just to review, to qualify for a HARP refinance, you must still:

-Be current on mortgage payments at the time you apply for a HARP refinance. You can have one 30-day late payment in the past 12 months, but none within the past 6 months.

-Have a loan on the property that is owned or guaranteed by Fannie Mae or Freddie Mac. [You can determine if you have a Fannie Mae or Freddie Mac loan at Fannie Mae Loan Lookup or Freddie Mac, or by calling 800-7FANNIE or 800-FREDDIE.

Hope for HARP, with a note of caution

Critics say that the original HARP, instituted in 2009, was too limited and would make only a slight dent in the crisis of underwater mortgages. Still, according to the Washington Post, between its inception in 2009 and the third quarter of 2011, HARP provided about 930,000 loans in total, or about 29,000 per month. An intermediate version of HARP 2.0, which began to take effect in late December 2011, spurred about 25,000 loans per month.

Some analysts suggest that he changes that take effect on March 17, 2012 could accelerate applications to the program. Moody’s has estimated that many as 1.6 million additional homeowners could benefit.

But there are some clouds on the horizon as well: Mortgage rates may be inching up. In late February, Freddie Mac reported that the average rate on 30-year loans has risen to 3.95 percent, up from the previous week’s rate of 3.87 percent. The average on the 15-year fixed mortgage rose to 3.19 percent from 3.16 percent. It hit a record low of 3.14 percent three weeks ago.  Rates above 4 percent could affect the attractiveness and effectiveness of HARP. That’s something to watch.