In an attempt to make the Home Affordable Refinance Program (HARP) more accessible in its second incarnation, government-controlled GSE Fannie Mae is no longer requiring borrowers to demonstrate that they can repay their home loans in order to refinance them[1]. The caveat was removed from the borrower-vetting criteria because lenders have argued that it is preventing them from refinancing loans through the HARP program. The lenders have been refusing refinance options because “the lack of clarity on what ‘reasonable ability’ precisely means could expose [them] to indemnification liability in the event that the loan defaults.” The removal of the clause will allow lenders to look more narrowly at the amount owed and the number of payments to be made rather than factoring in other facets of a borrower’s finances.

However, the changes to HARP may not be good news for everyone. For example. while Bank of America responded to the changes by affirming “strong support” for HARP, BofA investors could suffer because the prepayments triggered by refinancing can put a dent in returns on investments[2]. The Federal Housing Finance Agency (FHFA) projects that the number of participants refinancing through HARP could double in the next year alone thanks to the changes in qualification standards.

Do you think that removing “ability to repay” from the requirements for HARP was a good move or a bad one?

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