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HARP must work to avoid real estate redux

By Greg McBride, CFA · Bankrate.com
Wednesday, March 31, 2010
Posted: 3 pm ET

The Rodney Dangerfield of government housing programs, known as HARP, for Home Affordable Refinance Program, was quietly extended in early March. Instead of expiring in June of this year, the program is now set to expire on June 30, 2011.

To briefly recap, HARP is designed to facilitate refinancing for homeowners with little equity in their homes or those who are upside down with a first mortgage balance no more than 25 percent higher than the value of the home. To be eligible, loans must be owned or guaranteed by Fannie Mae or Freddie Mac, and the homeowner must be current on their mortgage payments. Despite trumpeting that HARP would help 4 million to 5 million homeowners, fewer than 200,000 homeowners have been able to utilize the program in the 12 months since its debut.

I refer to HARP as the Rodney Dangerfield of government housing initiatives because modifications get all the attention and focus -- from the media, from the government and from lenders. But the HARP program is, in my mind, the real key to avoiding another wave of mortgage rate reset-induced defaults in the next few years. Why? Because HARP is the one program that has the potential to get millions of homeowners out of mortgages carrying adjustable interest rates, avoiding the certain carnage that results when interest rates rise, and lock in the certainty of today's record low fixed rates -- along with the permanent payment affordability of a fixed monthly payment.

To fully tap that potential, a few things are required. The first, extending the expiration date of the program beyond June 2010, has happened, though I'll still quibble with the fact that the modification program (HAMP) is in place through 2012 while HARP gets a piecemeal one-year extension.

Another necessary step to boost the success of HARP is to raise the loan-to-value ceiling above 125 percent, or at least do so in the hardest hit states of Florida, California, Arizona and Nevada, where 125 percent LTV doesn't begin to address the issue due to home price declines of 50 percent or more. Going from helping 200,000 borrowers to potentially helping 4 million or 5 million will require a much higher LTV ceiling, but also the heft of government emphasis to make HARP front of mind to consumers and lenders the way HAMP is now.

Are there other issues to be ironed out? Absolutely. My colleague Holden Lewis has elaborated on complicating factors, such as loans with private mortgage insurance, removing the names of former spouses and deceased relatives from the note, and adding new spouses.

Nothing is as simple as it seems, and these necessary fixes aren't trivial. But considering what is at stake, there is no excuse for it not to happen.

The benefits of a successful HARP program are immediate and long-lasting. Doing so not only removes a sitting duck from the inevitability of tighter Federal Reserve monetary policy and sharp upward adjustments in interest rates and monthly payments, but could also help homeowners looking to reduce their current fixed mortgage rates. Chopping the rate on a $300,000 30-year fixed-rate mortgage from 6.5 percent to 5.5 percent saves $193 per month. That's $193 per month that can make its way into the economy in a different fashion or an additional $193 per month to accelerate debt repayment.

Refinancing these loans involves no extra risk to the taxpayer as the loans are already on the books of Fannie Mae and Freddie Mac in one form or another, and no further cash is extended to the borrower. Finally, it passes the moral hazard smell test because it is aimed at borrowers who are current on their loans -- those who are most capable of paying their loans and inclined to stay in their homes long-term.

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2 Comments
Greg McBride
May 03, 2010 at 4:30 pm

You can gamble on the LIBOR if you want. No one knows when it will head higher, only that it will. But long-term interest rates - that is, the fixed rate you'll refinance into - will head up first. By the time you realize the rising LIBOR is a problem, fixed mortgage rates won't be at 5 percent any more.
You're faced with a decision of whether to bite the bullet now - and have the certainty that the payment will never change again - or roll the dice for another year or two with no guarantees of where things will be.
One matter that may complicate refinancing only the first mortgage is the willingness (or lack thereof) of the second lienholder to resubordinate their claim. There have been many instances of second lienholders derailing a refinance by refusing to resubordinate.

fc
May 03, 2010 at 6:59 am

I have a first which is variable, currently 3.4 and a second which is 6.5. I recently received a feeler (not an offer) which would refinance only the first, presumably 5% or so. This would mean my payments would rise about $200 monthly. Is this a good deal? I am thinking about waiting a year as I do not think the libor is going to change that much until 2012. The first is for $220k and the second for $120. I am not underwater and am current on my mortgage.