On Monday, the White House announced a new initiative to help “underwater” homeowners, or homeowners with mortgages worth more than the properties associated with them, refinance their mortgage loans. Under the Home Affordable Refinance Program (HARP), the administration, working with the Federal Housing Finance Agency, plans to overhaul “key barriers” that have hindered homeowners from successfully refinancing their mortgages. The intended effect will be to offer homeowners with little to no equity in their homes the opportunity to refinance for the low interest rates available today, at lower costs. The opportunity is only available for Fannie Mae and Freddie Mac-backed loans.  “We have far too many Americans who have done all the right things, have paid their bills and are current on their mortgages, yet they are still stuck with 6% or 7% mortgages because home prices in their neighborhoods have made them ineligible for refinancing,” states Shaun Donovan, Secretary of Housing and Urban Development (HUD).  In the second quarter of 2011, 10.9 million — or 22.5% — of all homeowners were underwater on their homes, according to Corelogic, a Santa Ana, Calif.-based data firm. Homeowners burdened by underwater mortgages have, despite a bevy of government initiatives like HARP, been in many cases unable to refinance their loans and thwart the foreclosure process. HARP was created in 2009 to help as many as five million homeowners refinance their loans. As of today, the number of homeowners successfully able to refinance through the program has been 822,000 — painfully short of that goal. Worse, less than 10% of those 822,000 were homeowners more than underwater by more than 5% on their loans.  To make the refi process more effective for more homeowners, the implementation of five major changes to revamp HARP will take place. President Obama is scheduled to discuss the initiative, part of his new “We Can’t Wait” campaign, further while visiting hard-hit Nevada this week. Here are the HARP changes, as outlined by Secretary Donovan and Gene Sperling, Director of the National Economic Council, in a conference call earlier today:  1. No More Cap on Underwater Amount. Any homeowner who was more than 25% underwater on their mortgage was not eligible for HARP. Under the new initiative, any borrower, no matter how deeply underwater, will be eligible.  2. Lowered Homeowner Costs to Refinance. Donovan says many homeowners chose not to utilize HARP because of the high costs associated with doing so. To knock some of those costs down, the GSEs (Fannie Mae and Freddie Mac) will eliminate the risk-based fees they were charging for refi. The number of homeowners who need to get an appraisal to qualify for refi is being cut down too, with an automatic valuation technique being employed wherever possible. The cost of title insurance and loan processing are being reduced. And Donovan says the Treasury is collaborating with the Hardest Hit Funds in the hardest hit states housing-wise to see if there are ways for those states to help with closing costs as well.  3. Elimination of Reps and Warranties on Existing Loans. The mortgage lenders who made the original loans have responsibilities to Fannie and Freddie for the underwriting quality of those loans, but the resolution of those responsibilities has remained very murky territory. The result has been other lenders refusing to refinance existing loans because of uncertainty about what liabilities they might be taking on in the process. The FHFA says it will eliminate those reps and warranties on old loans and streamline the ones required on new refinanced loans. Sperling believes this will “unleash competition” among lenders to refinance loans. Despite the push to knock down closing costs, a “modest” fee will reportedly accompany this, details to be announced November 15.  4. Insurance Coverage Transferred to New Loan. Like lenders, mortgage insurers holding risks on underwater mortgages have had similar problems with reps and warranties that need to be resolved. Under this overhaul, the major mortgage insurers have agreed to automatically transfer coverage from the old loan to the refinanced loan.  5. Re-subordinating Secondary Loans. In many cases homeowners attempting to refi have secondary loans held by lenders that refuse to re-subordinate the loan behind the new refinanced mortgage loan. Donovan says the administration is working with the major lenders to automatically subordinate their secondary loans behind the refinanced loans.  The FHFA and the Obama administration estimate that addressing these “key barriers” will enable more underwater homeowners to successfully refinance, saving as much as $2,500 per household per year. The program’s deadline is also being extended out from summer of 2012 until December of 2013.  How many borrowers would be eligible for HARP under its new guidelines? Apparently the administration is trying to avoid making a projection right now: “The question of how many borrowers are ultimately eligible from the efforts announced today is uncertain and obviously the number of borrowers that will take this up is inherently uncertain,” dodges Sperling. Federal Reserve Governor Elizabeth Duke has estimated that up to four million homeowners appear to meet the basic criteria under these reforms.  A big issue yet to be addressed properly by the administration is more accessible principal balance modifications. It’s nice to have more access to refinancing, but in places like, well, hard hit Nevada, property prices in Las Vegas have plunged as much as 60% since the 2006 peak, according to Zillow. Donovan says there will be options under HARP to accelerate the reduction of negative equity, including allowing borrowers to switch from 30-year loans to 15-year loans to pay off their loan balances sooner. But that doesn’t really incentivize a person to hang onto their home when they could default and live rent free until either a short sale or foreclosure auction materializes.  Will these amendments usher in a higher success rate for HARP? Will it actually be enough of a cost savings to empower underwater homeowners to thwart foreclosure? Are the government’s efforts helping housing? Tell me what you think in the COMMENTS section below.
The Obama administration announces plans to expand refinance qualifications for the Home Affordable Refinance Program, hoping to help more homeowners while boosting the economy.