The Federal Housing Finance Agency (FHFA), with the Federal National Mortgage Association (“Fannie Mae”) and the (Federal Home Loan Mortgage Corporation) (“Freddie Mac”), today announced a number of changes to the Home Affordable Refinance Program (HARP) designed to increase the number of borrowers eligible for refinancing at-risk home mortgages.
One of the big deals of this new initiative is the removal of the loan-to-value ratio (LTV) cap on eligible fixed-rate mortgages. Now, mortgages that qualify for refinancing under the HARP have loan-to-value ratios of 80% to, well, as high as you've gotten yourself into.
It surprised me a little that 125% LTV wasn't enough, but after doing some math, I can see how LTV of 200% or more are not out of the question. In Miami, for example, inflation-adjusted home prices dropped 50% from 2007 to the end of last year. If someone took out a fixed-rate mortgage for most of the purchase price, then the loan-to-value would be in the neighborhood of 175% today if the borrower made regular payments against the mortgage.
Unlike the first- and long-time homeowner's tax credit, this initiative is almost completely for homeowners in over their heads. The minimum LTV ratio is 80%. That's not underwater but it's still fairly high leverage. The expanded HARP blanket is also targeted at people who are still making their payments; to qualify, there must have been no late payments in the past six months, and no more than one during the past year.
Is this HARP initiative throwing good money after bad?
This all makes for good press but guaranteeing loans this far underwater at attractive fixed rates isn't the kind of move the finance industry would make on its own. Under normal circumstances, lenders like (a) to be paid back, and like (b) to get interest that's commensurate with the risk they're taking with lending the money. Take away the risk of being paid back, and strange things happen, like really low interest rates for highly-undercollateralized loans.
That's the lender's side. But what about the borrower's side? Is it throwing good money after bad to take “The Enterprises” up on this offer? If the refinance actually does make things more affordable, yes. Pay the sucker down faster now that the payment's lower, or build up an emergency fund. Take advantage of it. The subsidy is there. It won't be there forever.
The economy would recover faster if the institutions and people exhibiting indiscretion were allowed to fail good and hard, but that's not the way we're doing it. Look into the new HARP initiative if you think you could benefit.
(And even if you're not underwater, if you haven't refinanced for a while, you might be pleasantly surprised with the current mortgage rates!)
(Thanks to Sustainable Personal Finance for including this article in the Carnival of Personal Finance.)
Refinancing at lower rates opens up cash flow. Instead of interest that gets hoarded, consumers will use for other debts or actually spend as discretionary funds. Imagine if the govt had sent checks to home buyers made out to their mortgage. Pay down mortgage and bank gets their money.
I’m not sold on this yet. I went through the process 2 years ago and the bank was nowhere near organized or staffed to handle to procedures. Every few months I had to resubmit my documents because they kept moving people , changing departments around, and simply being inefficient with their timeliness of responding to my case. All in all, it sucked and after 1 year in the system I came away empty handed.
It’s not always the bad people that get screwed. A year after I purchased my condo, the market tanked and half of the units were vacated or in foreclosure, pushing values lower and lower. Plus, I had been unemployed for 8 months, depleting my savings to remain current on all of my obligations. Never did I miss a payment. I just wanted to refinance to get out from under my 6.875% interest rate so I could replenish my savings. Sometimes bad things happen to good people.
I think this could be beneficial to some people who have lost jobs and find themselves sinking, but I don’t think it will help our country as a whole. Offering the program didn’t help the US the first time around. I don’t thing the new, improved program will help either.
We will have to wait and see if this keeps underwater homeowners from walking away from their homes. My gut tells me it may keep some from walking away but not enough.
Not a homeowner yet. One less thing to worry at this moment. Keeping my judgement on HARP reserved, I need more information
From what I glean from this post, this measure will – once again – allow people to get in over their heads on their loan. If that is the case, I wouldn’t favor it. I was responsible, only took out loans I could afford to pay back, then paid them back. Now I suffer because others couldn’t and the economy collapsed. Let’s not do it again, please!
Wow that stat on Miami home values is terrible. Hopefully most of the residents filed to lower their assessed value for their property taxes! It will be interesting to see what comes of these HARP changes. -Sydney