President Obama is travelling several Western states to talk up a re-vamp of his failed “Home Affordable Refinance Program” (HARP) in another big-government attempt to rescue homeowners who owe more on their houses than the real estate is worth.
Beginning in Nevada, the “We Can’t Wait” campaign is intended to show-up Congress while side-stepping them completely. Congress had passed HARP in an effort to help homeowners with troubled mortgages. The program promised to help about 5 million Americans, but in truth just 822,000 have been assisted – not even 10% of those upside-down on their home loans.
The new rules in “HARP Phase II” will loosen the rules on who can take advantage of the government program and reduce the fees the borrower must pay.
Eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers;
Removing the current 125 percent LTV ceiling for fixed-rate mortgages backed by Fannie Mae and Freddie Mac;
Waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by Fannie Mae and Freddie Mac;
Eliminating the need for a new property appraisal where there is a reliable AVM (automated valuation model) estimate provided by the Enterprises; and
Extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the Enterprises on or before May 31, 2009.
In the original program, only those that owed up to 125% more than the property was worth could be accepted into the program. Now, there will be no limit to the amount the borrower may owe in relation to the value of the property.
If Jim, as an example, owed $250,000 on his house and the home was only worth $175,000, he previously would have been denied a re-finance under the HARP program. Now, as long as Jim’s loan is backed by Fannie Mae/Freddie Mac, he can be approved. This will put the taxpayers on the hook for a quarter million dollars with only 175k in collateral. Who runs a business this way?
The program is also expected to only provide minimal relief. Due to the 20 year maximum term for the refinanced mortgage, monthly payments may only be 20-30 dollars less per month according to an example provided by the Federal Housing Finance Agency (FHFA).
If the borrower chose a 20-year loan term at a rate of 4.25 percent (mortgage rates tend to be less for shorter term mortgages), the monthly payment would be $1238 ($26 less than the borrower currently pays) and the borrower’s loan balance would reach $160,000 in five-and-one-half years
The real purpose of the new program may be even more deserving of investigation. This program doesn’t appear to modify existing loans. Instead, it replaces one loan for another. It’s a traditional re-finance with one major difference – Fannie and Freddie are letting the banks off the hook for any illegitimate loans they originated as long as they re-fi through this program. David Dayen at FDL puts it succinctly:
So, earlier, I said “what’s not to like.” Here’s what’s not to like. The “reps and warranties” part of this. When you refinance a loan, you’re essentially creating a new mortgage, unlike a loan modification, where you modify the old mortgage. Under the plan, the FHFA will eliminate their ability to force repurchases on these old loans, and they would lower their ability to force repurchases on the new loans created. There will be a “modest fee” associated with relieving these reps and warranties, according to Donovan, which won’t be set until November 15. They will be lower than the current risk-based fees that Fannie and Freddie charge.
What does this mean? A “reps and warranties” case is a case where the loan was originated improperly. When Fannie and Freddie get sold a bad loan like this, they have the right to force it back on the originator. New lenders are reluctant to refinance such loans, because they become liable for the put-back.
What this means is that FHFA will essentially settle on all the loans that get refinanced for a “modest fee,” which we can safely assume will be next to nothing. And we know that a substantial amount of loans, perhaps a majority, were illegally originated during the bubble years. You’re letting the lenders who originated the loans off the hook for that, in exchange for allowing more refis.
FHFA estimates that this program may double the current number of re-finances by the end of 2013. An additional $447 Billion to help perhaps another 882,000 home owners over the next two years? That’s more than half-a-million dollars per re-finance. Remember, they aren’t giving them half-a-million bucks, that’s just what Obama’s program costs to service 882,000 loans by the FHFA estimate.
“We Can’t Wait” may be yet another attempt to do anything quickly, no matter how ill-conceived it may be. Of some concern is where did the money to fund this come from if Congress didn’t approve it?
At a cost of $447 Billion this is a bank rescue and a move to prop up inflated real-estate prices all under the disguise of helping home owners. This ought to push the Occupy Wall Street crowd right over the edge .. but it won’t – because it came from Democrats.