The government’s Home Affordable Refinance Program will be changed to make it easier for homeowners to capitalize on current low interest rates by refinancing old, high-interest mortgages.
The plan represents the latest federal effort to tackle a key impediment to the U.S. economy – a stagnant housing market caused in part by elevated numbers of homeowners who owe more than their homes are worth. It came after numerous Obama administration efforts to stabilize the housing market have struggled in an economy with stubbornly high unemployment.
The overhaul will let borrowers refinance their mortgages regardless of how far their home prices have plunged in any given market, eliminating a previous restriction that shut out homeowners who owed more than 125% of their homes’ current value.
Officials estimated that the changes will help families save $2,500 or more, on average, annually.
The plan is also designed to streamline the refinancing process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments.
The refinancing program is open to homeowners whose mortgages are owned or guaranteed by Fannie Mae (FNMA) or Freddie Mac (FMCC), the two government-controlled mortgage giants whose rescue three years ago has cost taxpayers $141 billion to date.
Regulators are revamping a program rolled out in 2009, the Home Affordable Refinance Program, or HARP, which lets borrowers with homes whose values have dropped to refinance. So far, only 894,000 borrowers have used it, of which just 70,000 are significantly underwater.
Officials said they are trying to encourage Americans to shorten the terms of their mortgages, by replacing 30-year fixed-rate mortgages with shorter 15- or 20-year terms in which the principal is paid off faster.
Fannie, Freddie and the Federal Housing Finance Agency have agreed to waive fees for borrowers who refinance into loans with shorter terms, such as a 15-year mortgage. They will also reduce fees, but not eliminate them entirely, for everyone else.
The program could open up refinancing to borrowers in Nevada, Arizona, Florida and California who are paying above-market interest rates and who are deeply “underwater,” owing more than their houses are worth.
However, refinanced loans for those deeply underwater borrowers can’t be sold into traditional pools of mortgage-backed securities issued by Fannie and Freddie. Officials will take time to develop a way to sell these bonds, which isn’t likely to happen until early next year. DeMarco said investors in mortgage-backed securities sold by Fannie and Freddie are likely to be interested in bonds containing those loans.
The HARP program will be extended through 2013, beyond its current expiration date of June 2012. The program, however, is limited to loans that Fannie and Freddie guaranteed before June 2009. Loans that have been refinanced in the past 2 1/2 years, including those through HARP, won’t be eligible to refinance under the program.
Under changes disclosed Monday, banks will be largely shielded from the risk that they will have to buy back HARP mortgages. They only will have to verify that borrowers have made their last six payments, have no more than one missed payment in the last year and have a job or another source of income.
Fannie and Freddie will issue final pricing information and other technical details by Nov. 15, and some banks have said they could begin taking applications under the new program by as soon as Dec. 1. Mortgage insurers have also agreed to make it much easier to transfer existing mortgage-insurance coverage, which has blocked many borrowers from refinancing.