Hope and Frustration in New U.S. Effort to Help Homeowners
Tara Siegel Bernard: 2012
As mortgage rates have hit one record low after another, millions of homeowners have been forced to watch, longingly, from the sidelines. They haven’t had the option of refinancing because sliding home values pushed their mortgages underwater, meaning they owe more than their homes are worth. The banks would just not work with them.
Yet many of these borrowers are gainfully employed, have solid credit histories and have never missed a mortgage payment. And they want to stay in their homes — even if those homes are worth substantially less than they paid. These are the families that the government likes to call “responsible” homeowners.
The government’s initial effort, back in 2009, to ease refinancing rules to include them was underwhelming. Now, though, there may be reason for some guarded optimism, as the machinery for a new and improved government refinancing program is finally up and running. And this glimmer of hope for underwater homeowners — as well as borrowers with only a small sliver of home equity — has resulted in a rush of loan applications (even if they are unlikely to secure the lowest, rock-bottom interest rates).
“The updated program is still far from perfect, but most people, both consumers and those in the mortgage industry, would say it’s a huge improvement from what we had in the past,” said Guy D. Cecala, publisher of the newsletter Inside Mortgage Finance. “But the bar was very, very low with the old program.”
The rules for the initial program were restrictive. Partly as a result, only a little more than a million borrowers were helped, far short of the four million to five million initially predicted. So the government tried again, announcing the second iteration of the Home Affordable Refinance Program ® last fall — called HARP ® 2.0. It’s too soon to tell whether this latest version will be more successful or whether it, too, will end up in the dust bin of homeowner programs that overpromise and underdeliver.
From the perspective of big banks, borrowers have reason to be hopeful, though they need to be patient. The banks have been inundated with HARP ® applications — accounting for about 60 percent of all current refinancing applications at Bank of America and 40 percent at Wells Fargo — because of pent-up demand. Many institutions have added staff to handle the volume, and they have a big incentive to keep them motivated: analysts say they stand to make a tidy profit on the business.
But some homeowners and mortgage brokers are telling another story: one of frustration and still more obstacles. They say they’ve found that the program’s rules on paper don’t necessarily translate to the real world.
One of them is Terrence Janas, a 31-year-old software engineer, who bought a two-bedroom condominium in Oak Park, Ill., in 2008 for $280,000. Two virtually identical units recently sold for $150,000; one was a short sale. That has pushed his $237,000 mortgage far underwater; it’s now 158 percent of what his home is worth. He has a healthy income, a credit score of about 760, and simply wanted to reduce his 6 percent mortgage rate. “HARP ® was designed to help people in my situation,” said Mr. Janas, who has been trying to refinance for more than a year. “So why was I unable to take advantage of it?”
He said his application was denied by his current lender, GMAC, and about five others. Their reasons ran the gamut. GMAC told him it was because he had lender-paid mortgage insurance. Another told him that his “loan-to-value ratio” was too high — that is, the loan amount, divided by the home’s value — even though HARP ® 2.0 eliminated the cap. (Previously, only borrowers with ratios of 125 percent or less, meaning they owed 25 percent more than their homes were worth, could refinance.) Another told him he was not eligible for an appraisal waiver, and would need to get one showing that the property was worth at least $206,000, which Mr. Janas knew was unlikely.
But he is still trying, and is now working with a smaller lender who is more optimistic about his prospects. “I haven’t given up,” said Mr. Janas, who is getting married next month and would like to pocket the $400 a month he expects to save with a lower rate. Still, the number of success stories is edging higher. In the first quarter, HARP ® loans accounted for about 14 percent of all refinancing activity on loans backed or owned by Fannie Mae or Freddie Mac, according to Inside Mortgage Finance. That’s up from about 12 percent of refinancing activity for each of the last two years.
According to the Federal Housing Finance Agency, Fannie and Freddie’s regulator, HARP ® 2.0 has only been fully available since mid-March, “and the early results are dramatic,” said Meg Burns, a senior associate director at the agency. About 180,000 loans were refinanced through the program in the first quarter, nearly double the 93,000 loans in the fourth quarter of 2011. Refinancing among borrowers with loans that are more than 105 percent of their home’s value has increased to 41,000 during the first quarter, up from 13,000 in the fourth quarter. So how can you gauge your chances of refinancing your mortgage through the HARP ® 2.0 program?
First, you need to meet some basic requirements: Your mortgage must have been owned or guaranteed by Fannie or Freddie, and it must have been sold to either one before May 31, 2009. You must also have less than 20 percent equity in your home (that is, a loan-to-value ratio above 80 percent). And you cannot have had any late payments in the last six months, and no more than one late payment in the last year. HARP ® is also generally a one-shot deal: this has to be your first HARP ® refinancing.
Shopping around for a HARP ® refinancing may be frustrating, however, particularly if you’re trying to compare prices among the big banks. That’s because many of them, including Bank of America, Chase and Citigroup, are providing HARP ® refinancing only for their own customers. Why? Experts say it is still riskier for the banks to take on new customers, particularly those who are far underwater. It also makes sense for the banks to start with their existing clients, and several are expected to begin marketing campaigns aimed at them next month. But the regulator of Fannie and Freddie said that it should not make a difference whether a new or existing customer was seeking to refinance because it relaxed the rules that leave the banks responsible should a loan sour. Still, experts said, the lack of competition among banks has led to higher prices. It varies by lender, but HARP ® borrowers could pay more on their interest rate than with conventional refinancing, according to Laurie S. Goodman, a senior managing director at Amherst Securities Group. “The economics of origination would suggest lower rates are in order,” Ms. Goodman said, because mortgage servicers that are refinancing existing customers are relieved of certain risks. Nor, she said, do they have to do much to document the new loans since they already have the customers’ information. “And borrowers have little choice but to pay the higher rates.”
Wells Fargo is working with both new and old customers — though it isn’t accepting new customers with mortgage insurance since it can be difficult to transfer the insurance to the new loan. (Experts said there had been problems reported with some mortgage insurers refusing to reassign its insurance to the new HARP ® loan.) And if Wells buys a loan from a smaller bank or broker, it must have a loan-to-value ratio of 105 percent or less, meaning the borrower cannot be more than 5 percent underwater. Those limits do not apply to Wells’s own customers. Besides mortgage insurance, experts said, some borrowers have run into trouble or long delays if they have second mortgages. To complete the refinancing, the second lender needs to agree to remain second in line should the new loan default. Other experts said this hasn’t been a problem, particularly if the same bank holds both loans.
All the nuances that exist from lender to lender make it hard to figure out the best course to take. Rick Cason, a branch manager at Integrity Mortgage, a mortgage firm in Orlando, Fla., said he had been working with about 30 customers since March, and many of them were being denied by Fannie’s and Freddie’s automated underwriting systems, even though they meet the program’s new guidelines on paper. In some cases, he said he has found that reducing credit card debt has helped, even though the customers were within the allowed debt-to-income ratio limits.
Legislation was recently introduced by Senators Robert Menendez of New Jersey and Barbara Boxer of California, both Democrats, that would extend the program’s rules to homeowners with more than 20 percent equity, in part because the HARP ® program has fewer refinancing fees.
For now, it’s clear that borrowers, particularly those with more complicated financial situations or homes that are far underwater, may need to be persistent. In fact, starting on June 1, lenders will be able to securitize, or sell loans that are valued at more than 125 percent of the underlying home’s worth, which may provide more opportunities for homeowners significantly underwater.