Federal Agencies Make Changes to the Home Affordable Refinance Program

In October 2011, the Federal Housing Finance Agency (FHFA) announced changes to the Home Affordable Refinance Program (HARP). The stated goal of these changes is to increase the number of “underwater” borrowers[1] eligible to refinance their home mortgages while reducing credit risk for the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac.

Program Changes

Among the most significant program changes are the elimination of risk-based fees for borrowers who finance into shorter-term mortgages; removal of the loan-to-value (LTV) ceiling for some GSE-backed, fixed-rate mortgages; and a program extension. The announcement indicated that additional details would be released by Fannie and Freddie.

HARP was launched in April 2009 to allow refinancing for homeowners with performing GSE-backed loans with LTVs between 80 and 105 percent.[2] The program did not reach as many borrowers as expected.[3] So, in an effort to address some of its shortcomings, the October FHFA announcement included the following changes:

• Extension of the program through Dec. 31, 2013.
• Removal of the 125 percent LTV ceiling for fixed-rate mortgages owned or guaranteed by GSEs that were originated on or before May 31, 2009. This change does not apply to fixed-rate mortgages with terms greater than 30 years up to 40 years, or adjustable-rate mortgages (ARMs).
• Elimination of risk-based fees for borrowers who finance into shorter-term mortgages.
• Waiver of new appraisal requirements in those instances where a reliable automated valuation model (AVM) appraisal is available.
• Removal of certain seller and servicer representations and warranties on all HARP loans.

Guidance to Lenders

In November 2011, Freddie Mac and Fannie Mae released guidance to lenders on changes to their loan products that were originated under the expansion and extension of HARP. These details, relating to changes in fees, underwriting standards, and representations and warranties (with additional details released in December) are listed below and became effective for HARP loans with application dates on or after Dec. 1, 2011.[4]

Changes to Underwriting Requirements

• Borrowers must be current on their mortgage at the time of an enhanced HARP refinance, with no late payments in the prior six months and no more than one late payment in the prior 12 months.
• At least one borrower must provide source of income information and the lender must verify the source.
• Borrowers are not required to have the same occupancy as when the loan was first originated.
• If the loan payment increases by more than 20 percent under a HARP refinancing, all of the following requirements must be met:
  1. Minimum representative credit score of 620
  2. Maximum debt-to-income (DTI) ratio of 45 percent
  3. Verification of income sources, amounts and other assets if borrower is required to bring funds to closing

Representations and Warranties

The lender is relieved from the standard representations and warranties[5] for the new loan if the lender meets both of the following requirements:

1. All data in the loan case file is complete, accurate and not fraudulent
2. The lender follows the instructions provided by the GSE regarding income, employment, asset and fieldwork documentation

Delivery Fee Cap Adjustments

The following adjustments will apply to refinances of mortgages with LTV ratios greater than 80 percent[6]:

1. No charge for non-investor property fixed-rate mortgages of less than or equal to 20 years
2. 75 basis points (bps) for non-investor property fixed-rate mortgages of more than 20 years
3. 75 bps for non-investor property mortgages that have an adjustable rate
4. 200 bps for investment property mortgages

HARP Implementation

The GSEs’ automated underwriting systems cannot handle HARP 2.0 until March 2012; until the systems’ update is released, only the current servicer of the GSE loan is able to manually underwrite it. Therefore, if the current servicer of a HARP-eligible mortgage wants to refinance it into a new HARP loan, there is an incentive to do so immediately before competition is possible from other lenders, since only one HARP refinance is allowed per mortgage.

According to CoreLogic, almost 10 percent of all mortgages are underwater by more than 25 percent. Therefore, the removal of the 125 percent LTV cap will increase the number of borrowers who are potentially eligible for refinancing.[7] Moreover, defenders of the program claim that waiving the original loan’s representations and warranties makes HARP more attractive to lenders as it will protect them from many of the buy-back requirements they faced under previous rules.[8] Still, it remains to be seen if this will be enough to entice lenders to participate, whether they will impose additional fees or underwriting requirements beyond what the GSEs require, and whether investors will be willing to buy securities backed by these new HARP loans.

Endnotes

1. An underwater borrower’s mortgage debt exceeds the market value of the home. [back to text]
2. The maximum allowable LTV ratio was increased to 125 percent on July 1, 2009. [back to text]
3. 928,600 borrowers refinanced through HARP as of Sept. 30, 2011. [back to text]
4. The waiving of the 125 percent LTV ratio will only apply to mortgages settled with the GSEs after Feb. 1, 2012. [back to text]
5. Eligibility, credit history, liabilities, income and asset management [back to text]
6. Mortgages with LTV ratios less than or equal to 80 percent will continue to be charged a fee of 200 bps. [back to text]
7. Note that a significant number of high-LTV loans are not owned or guaranteed by the GSEs, and so are not eligible for HARP under current rules. [back to text]
8. Under previous HARP rules, representations and warranties entitled Fannie and Freddie to be reimbursed for losses on loans that were poorly underwritten at origination, even if the lender that refinanced the loan was not the originator of the first mortgage. [back to text]