HARP Mortgage Program Allows Homeowners to Refinance to Current Low Interest Rates.
Editor’s Note: The November 15 announcement included comprehensive rules for the new HARP, which people in the industry are calling “HARP 2.0.” How lenders will implement these changes in their underwriting process has yet to be established. Bookmark this page and check back regularly, as Bills.com will keep you informed of updates to HARP.
Update: HARP 2.0 debt-to-income requirements have changed. According to a Fannie Mae announcement on December 20th, lenders will not longer have to demonstrate that the borrowers have a “reasonable ability to pay, unless the loan payment increases by 20% or more.” This applies only to loans borrowers do with their current lenders through the manually underwritten Refi Plus system. Loan applications that go through the automated DU system (expected to be updated for HARP 2.0 by mid-March) will have to meet the basic DU 45% maximum debt-to-income requirement.
New guidelines for the Home Affordable Refinance Program (HARP) were released by Fannie Mae and Freddie Mac on November 15th, 2011. The updated guidelines come on the heels of the October 24th announcement by The Federal Housing Finance Agency (FHFA) about expanding HARP. The goal of expanding HARP is to allow borrowers who are upside-down on their homes or who have little equity to refinance at today’s low interest rates. The hope is that this will both stabilize the housing market and boost the overall economy, by putting extra dollars in the pockets of consumers who are likely to spend them.
Mortgage experts are optimistic about the new HARP. “Although there is still a good deal of uncertainty surrounding the specifics of how the expanded HARP program will be implemented at the individual lender level, the November 15 announcements from Fannie and Freddie do provide a source of encouragement for the equity challenged segment of the market,” said Peter Citera, vice president at Chicago Bancorp and mortgage education director at the Real Estate Institute.
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, according to CoreLogic, a data provider to mortgage underwriters. About 2.4 million hold less than 5% equity in their homes.
HARP At a Glance
HARP allows homeowners facing difficulties refinancing their mortgage through conventional methods to apply for a refinance of their mortgage. A homeowner that is current with their monthly payments but unable to refinance due to a drop in the value is the typical prime candidate for the HARP program. The ultimate goal is to allow a homeowner to do a mortgage refinance for a lower interest rate and overall monthly payment. Here are the general eligibility guidelines for HARP:
- There is no loan-to-value cap in the new HARP, for fixed-rate loans. This is the most significant change of HARP 2.0. Under previous versions of HARP, the LTV could not exceed 125%.
- The loan on your property is owned or guaranteed by Fannie Mae or Freddie Mac. Determine if you have a Fannie Mae or Freddie Mac loan by going online (check Fannie; and check Freddie) or by calling 800-7FANNIE or 800-FREDDIE (8 am to 8 pm ET).
- At the time you apply, you are current on your mortgage payments. You can have one 30-day late payment in the past 12 months, but none within the past 6 months.
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You have a reasonable ability to pay the new mortgage payments. Editor’s note: Fannie Mae removed the "reasonable ability to pay" clause. Please read the update at the top of the page for more information. - The refinance improves the long-term affordability or stability of your loan.
HARP Changes for Lenders and Effects on Borrowers
The following is a summary of key changes found in HARP 2.0. Some key underwriting details are not yet announced, and are expected to be released before March 2012.
- Limited Liability
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What’s new: A key provision of the new HARP is that it limits lenders' liability in cases of loan default. Essentially, Fannie and Freddie will not force the lender to buy back a non-performing loan.
Effect on you: This change should greatly expand HARP's reach. Lenders will be much more eager to offer HARP loans, where they were previously reluctant. With more lenders participating, you will have an easier time getting a HARP mortgage.
- Lender Fees Dropped
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What’s new: Fees that Fannie and Freddie charge lenders for high LTV loans are being cut.
Effect on you: The reduced fees are passed on to you, making your loan cheaper. If you are financing to a 15-year or 20-year loan, the fees are cut even further.
- Credit Score and Income Requirements Relaxed
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What’s new: As long as your new HARP monthly payment is not more than 20% greater than your current payment, specific credit and income guidelines do not apply. The lender will have to determine that the borrower is an “acceptable credit risk” (and what that means is yet to be determined).
Effect on you: A low credit score or high DTI is not enough to automatically disqualify a borrower. Also, if your family is now a one-income family when it was a two-income family on the original loan, you only have to show proof of one income, as opposed to conventional loans where all borrowers listed on the application must document income.
- Underwriting Requirements Relaxed
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What’s new No. 1: Mortgage Payment History: A HARP lender can approve a loan that has one late mortgage payment in past 12 months, as long as it did not take place in the last six months.
Effect on you: You won't be counted out for a mortgage late, when that could normally eliminate your ability to get refinanced at the lowest rates available. If you have a recent mortgage late, you can still apply for HARP, once you meet the relaxed mortgage late requirements.
What’s new No. 2: Relaxed Foreclosure & Bankruptcy rules: Your HARP loan could be approved, regardless of how recently a borrower filed bankruptcy or experienced a foreclosure.
Effect on you: Normally, if you filed for bankruptcy or experienced a foreclosure you would have to wait years before you could successfully refinance.
- Occupancy Requirements Relaxed
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What’s new: Owner Occupancy: HARP loans are no longer restricted only to owner-occupants.
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Effect on you: You can now use HARP to refinance your second home or investment property.
- Lenders Must Show that a Borrower Benefits
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What’s new: Lenders must show that the HARP mortgage borrower derives one or more of the following four benefits in the new loan:
- Reduce the size of the monthly payment
- Change to a more stable loan product, such as moving from an adjustable-rate mortgage to a fixed-rate mortgage
- Reduce the interest rate
- Reduce the loan amortization term (moving to a shorter-term loan)
- Relaxed Condominium Requirements
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What’s new: HARP eligibility used to require that no more than 10% of units in the complex be owned by one person and that no more than 20% of owners in the complex be behind on their HOA dues. These requirements are now removed.
Effect on you: More condo owners will now qualify for HARP. If you own a condo, your qualifying for the HARP program is no longer dependent on your neighbors' finances.
“Condominium owners have perhaps the best reason to be optimistic; lenders are being relieved of the responsibility (for HARP refinance loans only) to ensure that condo projects meet the often strict project approval requirements of Fannie Mae and Freddie Mac,” Citera said. “Borrowers living in condominium projects that have seen a sharp increase in the number of renters, or those that have experienced some level of budgetary stress, will be much more likely to find relief under HARP 2.0 than they have under existing programs (as long as their loans are owned by Fannie or Freddie).”
Hold Your Horses
Although applications may be submitted for new HARP 2.0 mortgages in December, 2011, Bills.com believes the bulk of HARP mortgages will not be approved until March, 2012. Both Fannie and Freddie must update their automated loan underwriting/approval software by March, 2012. Until then, while lenders may approve HARP mortgages by manually underwriting the loans, loans that are manually underwritten expose the lender to greater risk. If a manually underwritten loan defaults, the lender will be required to buy back the loan.
Given the protections that the lender will have once the automated underwriting programs are updated and ready in March, 2012, it seems very likely that most loan originators will wait until March, 2012. Be ready to move forward with an application, once lenders start taking them, but be prepared for a very long process before your loan closes.
Before refinancing, borrowers should know whether their current loan is a recourse or non-recourse loan and also be familiar with their state’s anti-deficiency laws. Refinancing a non-recourse loan could expose the borrower to responsibility for a potentially huge financial obligation where no such obligation currently exists.
Recourse, Non-recourse, and Anti-deficiency
In some states, refinancing can remove the consumer protections, called anti-deficiency laws, which protect underwater homeowners who default on their mortgages. Bills.com recommends homeowners learn the anti-deficiency laws in their states, and determine if a mortgage refinance changes their rights. Anyone with a non-recourse loan should carefully weigh the decision to turn a non-recourse loan into a recourse loan.
Basic HARP Requirements
Not every upside-down home qualifies for HARP 2.0. Here is a summary of the basic requirements:
- The loan must be owned or guaranteed by Fannie Mae or Freddie Mac
- The loan was sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
- The loan was not refinanced under HARP previously, unless it is a Fannie Mae loan that was refinanced under HARP from March through May, 2009.
- The loan’s current loan-to-value (LTV) is greater than 80%.
More About HARP 2.0
Many readers have asked Bills.com about mortgage insurance and how it may impact qualifying for HARP 2.0. Mortgage insurance on a loan should not block a refinance under HARP 2.0. See the Bills.com resource Mortgage Insurance and HARP Refinance to learn more.
Readers who do not have Fannie, Freddie, or other GSE loans are not eligible for HARP 2.0. In late January 2012, President Obama proposed a similar plan for non-GSE home loans. See Obama Refinance Plan for more information on this proposal.
More HARP updates will be released both by lenders and by Fannie and Freddie, so keep checking with Bills.com to stay updated on details of the new HARP program.
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