Understanding HARP II: A BEREL Educational Report

This past Monday, president Obama announced that the administration would be easing the eligibility requirements for homeowners who wished to refinance their home loans and take advantage of historically low interest rates to reduce their mortgage payments and, potentially, save their homes from foreclosure. His plan to accomplish this revolves around making crucial changes to an existing refinance plan, the Home Affordable Refinance Program (HARP) in order to enable more homeowners to qualify for the program. The idea behind these changes and the resulting program, HARP II, is that the swelling wave of foreclosures can be stalled and even stopped if refinancing is available for homeowners struggling to make payments on underwater homes.

There has been a lot of buzz in the media about how this program could help 1.6 million homeowners, but many people are looking at this information with a jaded eye in light of other Home Affordable program failures like the Home Affordable Modification Program (HAMP), which notoriously flopped and helped less than a million of its projected 4 million homeowners aided[1]. HAPR I also helped 4 million fewer homeowners than were originally predicted to benefit from the program.

In order to make best use of these changes, homeowners and real estate investors need to understand exactly what their options are. In this report, we will investigate HARP as a plan and identify the changes in HARP II that are intended to make the program more successful.

History of HARP

HARP debuted in 2009 to little fanfare in the shadow of the rest of the Home Affordable family, which includes the beleaguered HAMP and the Home Affordable Foreclosure Alternative (HAFA) programs. It was intended to help homeowners by making refinancing available to homeowners with less than 20 percent equity in their homes, but tended to eliminate many underwater borrowers because the properties could not be more than 25 percent underwater[2]. As home prices have continued to plummet, more and more homeowners found themselves underwater in excess of 25 percent, rendering the original HARP plan increasingly irrelevant to the group of homeowners it was intended to help.

To further complicate matters, HARP refinance options required appraisals, closing costs and additional fees. In today’s economy, many homeowners were unable to afford these fees and as a result were unable to participate in the program even if their property met all the requirements. In its prior manifestation, HARP helped slightly fewer than 900,000 families with Fannie Mae- or Freddie Mac-backed loans refinance into “lower cost or more sustainable mortgage products” since the program was put into action[3].

What Does HARP Offer?

HARP is intended, as Fannie Mae’s official information packet explains it, to move homeowners into a “more stable product” to use in the financing of their home[4]. However, to know if HARP applies to you, you might want some clarification on what a “stable product” might be. Fannie Mae defines stable products in the mortgage industry as follows:

• Fully amortizing mortgage products that enable homeowners to move out of loans with interest-only features and enable them to accumulate equity in their property
• Fixed-rate mortgages (FRMs)
• New adjustable-rate mortgage (ARM) products that have an “initial fixed period of five years or more” and that are “equal to or greater than that of the existing mortgage” so that “pending payment shock” is eliminated
• Shorter-term fixed rate mortgages that enable homeowners with 30-year mortgages to accelerate amortization of principal and building of equity.

Ultimately, HARP is intended to help homeowners move from whatever level of stability in their home financing that they are experiencing now to a greater degree of stability.

Who is HARP II For?

According to National Association of Mortgage Brokers (NAMB) president Michael D’Alonzo, HARP II “will not only help responsible homeowners who have been unable to refinance because the equity in their home has disappeared, but it will…allow homeowners to reduce their monthly payment…[and] spur the economy”[5]. In short, the PR guys will tell you that HARP II is for everyone, with the “average American homeowner who pays their mortgage on time but is underwater” being the main beneficiary.

In reality, the boundaries for eligibility have been expanded, but it remains to be seen to just what extent those changes will affect the number of people able to take advantage of the program.

Here is a brief summary of who qualifies for HARP II:

• People with Fannie Mae- and Freddie Mac-backed mortgages
  **This is the big one. You must have a loan backed by a GSE to qualify**

• In some cases, people who purchased their homes subject-to an existing mortgage backed by one of the GSEs
• Investment properties that are manufactured housing
• Investment properties that are cooperatives
• 2-4-unit second homes
• Homeowners with loan-to-value ratios of greater than 125 percent
• Homeowners that are current on their mortgage payments. Delinquent loans are NOT eligible.

• Loans created before May 31, 2009 only
• People who have  not already refinanced through HARP I

There are also some additional changes designed to expand HARP II’s range. They include extending the operation of the program through December 13, 2013, eliminating new property appraisals and a number of fees, and using automated valuation models (AVMs) when possible to ascertain the value of the property. However, if the LTV ceiling remains a non-issue when lenders are done working their way through the guidelines and the end-result is revealed in December of this year, the valuation issue may not be very big anyway. And there’s the rub, for those of you who were looking for it:

HARP II, like HARP I, relies on lenders to implement these changes and refinance loans based on these new rules and processes. As one analyst points out, “implementation and participation by the private lenders, servicers, mortgage insurers and others remains THE key to success, and availability, of HARP II”[6].

Optimistic Projections

If HARP II goes according to plan, then the average homeowner in t he program is expected to save $2,500 a year, and federal analysts predict as many as 1.6 million of these “average homeowners” to end up in the program. Additionally, they plan for those homeowners to pump that $2,500 right back into the economy, thereby boosting what many economists are starting to describe as a “stagnating” recovery[7].

Critics of the plan, however, are calling the plan “much ado about nothing,” as John Burns, head of John Burns Real Estate Consulting, puts it, adding that “it’s almost meaningless.” Even HUD secretary Shaun Donovan is trying to keep inflated expectations for the program in check, emphasizing that HARP II is “only one piece of a broader strategy to help the housing market.” Meanwhile, critics from both sides of the aisle warn that HARP II is not a fix-all because it “fails to get at the root cause of the housing market’s problems, which is the 3.5 million homeowners who are either in foreclosure or at least four months behind,” says Moody’s senior director Celia Chen[8]. If you’re part of that 1.6 million, though, you’re probably pretty interested in this program.

So When Can You Get Started?

HARP II changes will take effect no sooner than December 1, 2011, and will likely be delayed until January 2012 or later thanks to the time it will take for lenders to go through the program outlines, analyze the risks and implement the changes necessary to incorporate HARP II into their refinance programs. The administration hopes that easing banks’ liability to repurchase defaulted HARP II loans will speed this process. Industry participation in HARP II is not mandatory, but Bank of America, Citigroup, Chase and Wells Fargo have already publicly announced that they will be participating in the program[9].

For now, if you want to refinance your home through HARP II, you have little option but to hurry up and wait. Do everything you can to get your papers and your information in order, and, as with most dealings with lenders, you need to keep copies, records and a careful calendar to insure that you optimize your chances at showing you qualify for this refinancing when the final manifestation of the program is available.

Thank you for reading the Bryan Ellis Real Estate Letter!

Please remember that all information is for educational purposes only. Seek the advice of all appropriate professionals on your unique situation before making financial decisions.

Reference sources and materials may be viewed below.