Monday, October 24, 2011

Federal Government Overhauls HARP

The Federal Housing Finance Authority (FHFA) today announced that it is overhauling the Home Affordable Refinance Program (HARP) in order to make it accessible to more Americans.  HARP allows homeowners who are current on their existing mortgages, but "underwater" (meaning that their loans exceed the value of their homes) to refinance and take advantage of historically low interest rates.  A homeowner who has a loan at 7%, for example, could refinance around 4%, saving hundreds of dollars per month in interest. 

HARP only applies to mortgages owned or guaranteed by Fannie Mae and Freddie Mac.  It only applies to loans where the borrowers are current on their obligations.  Still, the modified program announced today could benefit many homeowners by (1) reducing or eliminating refinancing fees; (2) removing the 125% loan-to-value ratio ceiling for fixed-rate mortgages backed by Fannie and Freddie; (3) eliminating the requirement of an updated appraisal; and (4) extending HARP to December 13, 2013.

HARP has been around since April 2009, but fewer than 900,000 households have taken advantage of the program.  However, based on data provided by FHFA, HARP refinancings have provided the bulk of refinancings in the past two years.  Hopefully, this modified program will help underwater homeowners take advantage of low mortgage rates.

You can read about the program in the press release, in the New York TImes, and in the Wall Street Journal.  (By the way, if you only read one of these -- the WSJ article is the most thorough.)

Although I think that this expansion of HARP is a positive move, it will do little to address the most significant problem facing the residential real estate market.  We (the homeowners of America) remain massively overleveraged.  The residential market and the broader economy cannot recover until a significant deleverage takes place.  Unfortunately, neither the administration nor any of the GOP candidates have proposed a plan that will allow this deleveraging to take place in an orderly fashion.  Our default (pun alert) deleveraging strategy is thus bankruptcy and foreclosure. HARP will help many homeowners make their monthly payments, but lowering interest rates (and presumably adding to the principal through closing costs) will do nothing to help homeowners deleverage.

Just another cheery observation for your Monday afternoon.

Tanya Marsh

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