ByJulia S. Maues, Jim Fuchs
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 eligible to refinance their home mortgages while reducing credit risk for the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac.
Percent Homeowners with Mortgage
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. The program did not reach as many borrowers as expected. So, in an effort to address some of its shortcomings, the October FHFA announcement included the following changes:
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.
Changes to Underwriting Requirements
Representations and Warranties
The lender is relieved from the standard representations and warranties for the new loan if the lender meets both of the following requirements:
Delivery Fee Cap Adjustments
The following adjustments will apply to refinances of mortgages with LTV ratios greater than 80 percent:
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. 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. 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.