It took a few weeks, but we’ve finally got concrete details regarding the Obama Administration’s so-called “Broad Based Refinancing Plan.”
First off, homeowners with Fannie Mae and Freddie Mac-backed mortgages who are unable to refinance their mortgage to take advantage of the near-record low mortgage rates will be able to go through HARP 2.0.
HARP 2.0 was introduced back in October to address the needs of homeowners who were too deeply underwater to meet the max loan-to-value ratio cap of 125 percent.
Borrowers with underwater mortgages backed by Fannie and Freddie will continue to go through this program assuming they meet the guidelines.
So nothing really changes here, except perhaps the actual adoption of the problem, which appears to have been sluggish thus far.
Refinancing Program for Non-GSE Mortgages
What about all the underwater borrowers with non-GSE mortgages, those that are not backed by Fannie and Freddie?
Well, Obama is “calling on Congress” to pass a new refinancing program geared toward these homeowners, managed by the FHA.
It would be open to all those with non-GSE mortgages (less jumbo mortgages) who have kept up with their mortgage payments.
The big distinction here is that it requires Congressional approval, which may be an uphill battle. So really it’s just an idea at this point, not a live program.
Still, these are the proposed guidelines:
- Borrower is current on mortgage for past 6 months and hasn’t missed more than one payment in previous 6 months.
- Minimum credit score of 580
- Loan amount does not exceed max conforming loan amount
- Loan is tied to a single-family, owner-occupied property
Borrowers who meet these very simple guidelines will apply via a streamlined process designed to make it easier and cheaper to refinance.
To determine eligibility, a borrower must only prove they are currently employed. However, even the unemployed can qualify if other requirements are met and they present “limited credit risk.”
A new tax return and appraisal is not necessary to refinance.
The Obama administration will work with Congress to set loan-to-value limits for loans submitted to the program.
While a number hasn’t been set, the Administration used 140 LTV as an example, noting that mortgage lenders could write down the balance of mortgages that exceed that number.
How Will the Refinance Program Be Paid For?
Good question. Well, the cost of the refinancing program is estimated to range anywhere from $5 to $10 billion (quite a range isn’t it).
To avoid any taxpayer burden, the refinancing plan will be fully paid for by the proposed “Financial Crisis Responsibility Fee,” which imposes a fee on the largest financial institutions.
This fee will be based on the size of the institution and risk of their activities.
The FHA, who is set to manage the program, will even pay for a borrower’s closing costs if they choose to go with a shorter-term mortgage, such as a 15-year mortgage.
Those who refinance into mortgages with terms of 20 years or less will have their closing costs paid for the FHA. The GSEs will do the same for HARP 2.0 borrowers.
The Administration hopes this will promote responsible borrowing and reduce the amount of time it takes for borrowers to get back above water.
The existing Home Affordable Mortgage Program is also being expanded to help more borrowers receive assistance.
The first-lien mortgage debt-to-income ratio limit of 31% apparently eliminates certain borrowers from the program because it doesn’t address other monthly obligations.
So the program will consider secondary debt with more flexible debt-to-income criteria.
Additionally, rental properties will be added to the program so long as a tenant currently occupies them or the borrower intends to rent the unit.
Finally, the Treasury will offer bigger incentives to the owners of mortgages who agree to write down principal.
Currently, owners receive between 6 to 21 cents on the dollar for principal reductions. This amount will be tripled to 18 to 63 percent on the dollar.
Fannie Mae and Freddie Mac, who do not currently receive compensation for principal reductions on loan modifications, will also receive principal reduction incentives
The obvious losers are holders of jumbo mortgages, who are more than likely homeowners in hard-hit states like California and Florida where home prices have plummeted.
There doesn’t appear to be any relief for this type of homeowner, which is certainly a concern.
Additionally, those behind on their mortgage payments won’t benefit from this new refinance program.
So really only borrowers who have been able to make their mortgage payment each month will benefit.
Also, investors who hold non-GSE loans won’t see any benefit. And those with poor credit scores will be out of luck.
In other words, plenty of homeowners will miss out here, but it’s a tall order to include everyone.
Homeowners Bill of Rights
For the record, the Obama Administration also introduced several other initiatives, including a “Homeowner Bill of Rights,” which will once again revamp and simplify mortgage disclosures.
This includes a foreclosure appeals process and guidelines that prevent conflicts of interest that wind up doing harm to homeowners, along with a joint investigation into loan origination and servicing abuses.
Major banks and the GSEs will also provide up to 12 months forbearance for unemployed borrowers.
Additionally, a pilot program that transitions foreclosed property into rental housing will be employed to stabilize neighborhoods and get the housing market out of its funk.
At first glance, it sounds like an awesome program to save housing once and for all. But upon closer inspection, a lot of homeowners are left out, as mentioned above.
Along with that, the borrowers that are targeted may not really be the ones that need help.
The reality is that millions of people who are currently behind on their mortgages are going to lose their homes. And this program won’t change that. It’s simply going to help those on the brink, or even those that don’t even necessarily need assistance to make their mortgage payments, but want to catch a break after buying at the wrong time.
Sure, if all goes well, it could reduce foreclosures to some extent, bolster home prices somewhat, and get more money flowing into the economy. But it still requires Congressional approval to work. And even then, we won’t see a housing recovery without meaningful economic improvement.