Obama’s Refi Initiative: What’s It All About?

By Robert Freedman, Senior Editor, REALTOR® Magazine

The administration yesterday rolled out an initiative to boost refinancing so struggling underwater borrowers can take advantage of today’s historically low interest rates. The effort is being called HARP 2, with “HARP” standing for Home Affordable Refinance Program and “2” standing for the fact that the first iteration of the program, rolled out two years ago, hasn’t attracted the volume of refis that’s needed to match the scale of the problem.

Under the new version of the program, lenders process refi applications for borrowers no matter how deeply they’re underwater. Previously, the limit was set at borrowers whose loan-to-value ratio was no more than 125 percent. Even so, the program isn’t intended for all underwater borrowers; just those who have been conscientious in making their payments despite having to pay on a mortgage that’s larger than the value of their home. Those who have stopped making payments or who have a checkered history of making payments can’t apply.

For eligible borrowers, the refi option is available to them without the lender having to order a new appraisal, which saves them several hundred dollars, and they get a waiver on fees that Fannie Mae and Freddie Mac would otherwise charge them because they’re high risk (that is, they’re underwater). Lenders, in turn, get relief from having to make representations and warranties that would otherwise hold them liable for losses on defective loans.

There are other important pieces to the initiative, including a requirement in some cases for borrowers to refi into a shorter-term loan to get all of the benefits.

It’s too soon to know how much the initiative will help borrowers. Some of the provisions require federal guidance, so lenders can’t start processing applications right away. And Fannie Mae and Freddie Mac still have to do some updating of their automated underwriting programs, and lenders, in turn, have to update their underwriting procedures. In short, you can expect little to happen before the first part of next year.

The Federal Housing Finance Agency, which oversees Fannie and Freddie as their conservator, is the main agency behind the initiative. You can read all the program details at its Web site.

For you, as a real estate agent, the benefit of a successful HARP 2 will be mainly on a macro level. The improved financial condition of participating households will lessen the chance of them defaulting on their payments and forcing the lender to foreclose on their mortgage. That will help reduce the number of foreclosures coming onto the market, which will help curb further price declines. It will also help give these borrowers some financial breathing room, so they might start spending again, which is something the economy needs to help it sustain its growth. All of these are big ifs, but the initiative at least shows the federal government understands housing is at the core of the country’s economic doldrums and it’s starting to look for ways to give it a boost.

As it looks for more ideas, it can start with NAR’s five-point housing plan, which calls for the federal government to stop doing harm to the market by talking about changes to the mortgage interest deduction, lowering FHA and conforming loan limits, and proposing a 20-percent down requirement. Those and other pieces of the plan are outlined in plain language online.

For all the focus on HARP and HARP 2, it’s worth noting that the lion’s share of refis since the downturn have been done outside the HARP structure and that will continue to be the case. (See below. HARP refis are shown in grey; regular refis are shown in blue.)

For borrowers who aren’t underwater or who don’t have a Fannie Mae or Freddie Mac loan, their ability to refinance is dependent solely on lender policies. NAR continues to urge lenders to dial back their underwriting requirements to the sound policies that were in place prior to the housing boom. To the extent lenders replace overly tight standards with prior sound policies, borrowers will be able to take advantage of today’s low interest rates, and that will certainly help the economy.

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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  1. carmen smith

    This appears to be for Fannie Mae and Freddie Mac loans.
    Is there anything like this for FHA loans?

  2. Robert Freedman

    Carmen, thanks for your note. For non-Fannie and Freddie loans there are no refinance guidelines from the Federal Housing Finance Agency. As the agency says in its release, “Neither FHFA nor the Enterprises [Fannie and Freddie] have the legal authority to extend HARP to borrowers whose mortgages are not owned or guaranteed by Fannie Mae or Freddie Mac.” You’ll need to check with lenders on their refi rules for non-federally backed loans.

  3. I think the best program would be if the treasury to take up to 20% of home’s value with a rate of 1% like it gives to the banks and let the banks re-finance the 80% remaining with 4% fixed 30 years. Any under water amount should be forgiven by the lenders since they are the ones who made this mess. People will stay in their homes if they do not owe more than their house worth.

  4. I read somewhere that foreign investors that spend $500,000 on real estate will get a 3 year visa, $250,000 in their own home & the rest in residential real estate. Can you fill me in?
    Much thanks, Bob

  5. Yes! the challenge is a $200K home mortgage, @ 20% off will still be, $160,000 and still upside down in our Pensacola Market and the appraisal will reflect such. 4% works and fixed rate for 30 years makes sense.

    Phil Woolley CRS

  6. Phyllis shapiro

    I have Fannie loan. I have a 30 yr loan at 6.5 % it is fixed at interest only for 10 years does this new program address this issue? will I need to go into or will I be able to choose a fixed loan? this has been an issue when I have attempted a HARP request in the past.

  7. Denise

    This is good news for the homeowner who has been making underwater payments. How does this serve those homeowners who have been current on house those payments but have had to let other obligations suffer to keep their home in turn lowering their credit score thus not allowing them the lower rates.

  8. I think this provides a HUGE opportunity for people in in markets that lost value so quickly and before the current HARP program was launched. In my market of Temecula, Murrieta and the rest of the Inland Empire, we lost 50% of our home value over a 16 month period……long before the 125% HARP was available to them.

    There are thousands of homeowners over 125% LTV who want to stay in their home even if they are upside down…they just want a shot at the same lower rate that everyone else has had up to this point.

    If someone has paid their mortgage on time for the last three years fully aware they are 190% LTV,what are the odds they will default if this new Obama HARP refinance program allows them to reduce the payment by another $200-$300/month?

    However, for those who can’t refinance using this revised HARP program, this may be the straw that breaks the camels back and causes them to strategically default. people don’t like having a carrot dangled out in front of them and never being able to reach it.

  9. Kelley Johnson

    Has anyone addressed an underwater borrower being able to utilize the mortgage interest deduction on their federal income tax return on a loan that exceeds the fair market value of their home? IRS Pub936 states it is not allowed. It seems there could be some implications here. Anyone agree?

  10. Thanks for sharing your thoughts about FHFA. Regards