Breaking news — HARP 2.0 is not going to take care of the housing crisis in the long run. The reason: HARP 1.0 failed in the short run.
Of the 4 million families with underwater mortgages backed by Fannie Mae and Freddie Mac, my guess is that 140,000 will actually refinance, and 140,000 will go into foreclosure. I did the math.
To set the stage:
HARP 2.0 – HARP stands for Home Affordable Refinance Program — is "being billed as an improvement over the 3-year-old version that just about everyone acknowledges didn’t help anyone," according to reporter Al Heavens of the Philadelphia Inquirer.
The reason for that failure, Heavens says, is that the original program had limits on loan-to-value ratio, the amount of a mortgage as a percentage of the appraised value-say, $300,000 versus $150,000 — the borrower wasn’t allowed to refinance.
In other words, HARP 1.0 failed because it was ill-conceived.
Do you know anyone who has done a quantifiable market study to determine HARP 2.0’s probable impact on the market? Neither do I.
(Editor’s note: Loan data aggregator CoreLogic has estimated that there are more than 2.3 million borrowers with a "strong likelihood" of potential eligibility for refinancing through HARP 2.0.)
But here is the good news, Philadelphia mortgage broker Fred Glick tells Heavens: "It is a great way to get rates down in spite of low values because this will decrease the supply of homes for sale and increase values in the long run."
I cannot find my copy, but I am sure HARP 1.0 promised the same thing. So far, we know that ‘the long run’ is at least four years, with no finish line in sight.
However, let us look at the facts with a positive attitude.
There are only a few reasons this program, like all the others, should not take off like a scalded dog, and provide much needed relief for the estimated 4 million Fannie Mae and Freddie Mac borrowers nationwide who owe more on their mortgages than their homes are worth. This ends the positive attitude portion of this column.
"Even with months of trying, all the lenders, courted for months, are not on board and they must be because Fannie and Freddie loans are pooled as mortgage- backed securities that are owned by many investors," Heavens writes.
(Editor’s note: HARP and HARP 2.0 are voluntary programs that provide incentives to lenders and borrowers. Lenders are not required to participate, and only borrowers whose loans have been securitized into mortgage-backed securities with payments to investors guaranteed by Fannie Mae and Freddie Mac are eligible for HARP refinancings. Some industry observers believe HARP 2.0 will be embraced by lenders, because lenders who sign off on a HARP refinancing will be released from some legal liabilities associated with "representations and warrants" made on both the original loan and the new loan.)
In addition, there are restrictions that will reduce eligibility substantially. Let us get to the math, starting with the estimated 4 million underwater prospects:
Homeowners cannot qualify, if:
- You are not current on your present mortgage. Subtract 2 million, balance 2 million.
- You closed on your mortgage after May 31, 2009. – Subtract 100,000, balance 1.9 million.
- You refinanced with HARP before — subtract 10,000 (not a typo), balance 1,890,000
- Your mortgage doesn’t fall under current "conforming loan limits" and this varies by region (Subtract another 1 million, leaving a balance of 890,000 eligible homeowners
- Refinanced funds may not be used to satisfy subordinate financing in the form of a home equity line of credit or a closed-end second mortgage. Delete 500,000 bringing the market to 490,000
(Editor’s note: According to the most recent numbers from Fannie and Freddie’s regulator, the Federal Housing Financing Agency (FHFA), lenders completed 1,122,568 HARP refinancings through Feb. 29 2012, but only 110,315 were for borrowers with loan-to-value ratios above 105 percent.)
But wait, the government is going to urge, advise, and encourage the 490,000 in an easy-to-understand way to change the type of programs they now have, and I quote Heavens:
- "Borrowers with an interest-only loan will be urged to refinance to a mortgage product that provides amortization of principal and accumulation of equity in the property.
- "Those who have an adjustable-rate mortgage will be encouraged to refinance to a fixed-rate loan that eliminates the potential for payment shock, or to an adjustable with an initial fixed period of five years or more and equal to or greater than the existing mortgage."
- Homeowners with a 30-year fixed-rate mortgage will be advised to refinance to a 15,20 or 25-year fixed that offers, in Fannie Mae’s words, accelerated amortization of principal and equity building.
- But borrowers will not be allowed to cash out equity under this refinancing "except for closing costs and certain allowances to cover items such as association fees, property tax bills, insurance costs, and rounding adjustments.
- "Balloon mortgages and convertible adjustable-rate mortgages are eligible for HARP 2.0 if the conditional right to refinance the balloon or convert the ARM was exercised or ‘redelivered’ to Fannie Mae before June 1,2009," according the Philadelphia piece.
My prediction for the future: Of the 490,000 HARP 2.0 applicants who were urged, encouraged, and advised, 350,000 said "no thanks" leaving a balance of 140,000 who actually refinanced. The remaining 210,000 applicants did not like the programs offered. Of those, 60,000 went on with their lives, and the other 140,000 decided to making their mortgage payments and go into a foreclosure.
Somebody prove me wrong. Please!