How Will the Federal Home Affordable Refinance Program Help Homeowners?

March 22, 2012 — -- The mortgage industry is buzzing about HARP 2, the revamped federal Home Affordable Refinance Program. Some are predicting it will trigger the biggest refi boom of the decade. But will it really help homeowners whose loans are deeply underwater refinance into low-rate loans? Or is this more hype about a program that will help far fewer homeowners than promised? Guidelines released recently by one of the nation's largest mortgage lenders raises questions about where the program is headed.

The expanded Home Affordable Refinance Program (HARP 2) is designed to make it easier for homeowners who owe much more than their homes are worth to refinance their loans into low-rate, fixed-rate loans. Under the original HARP, a first mortgage could not be refinanced if the new loan amount would exceed 125% of the home's value (125% LTV). HARP 2 does away with that cap, with the goal of allowing homeowners who are seriously upside down on their loans to refinance.

That means this program potentially could help a lot of borrowers. According to CoreLogic research:

Of the 11.1 million upside-down borrowers, there were 6.7 million first liens without home equity loans and an average mortgage balance of $219,000 at the end of 2011. This group was underwater by an average of $51,000 or an LTV ratio of 130 percent. The remaining 4.4 million upside-down borrowers had both first and second liens and were upside down by an average of average of $84,000 or a combined LTV of 138 percent…The removal of the 125 percent LTV cap via HARP 2.0 means that over 22 million borrowers are currently eligible for HARP 2.0 when just considering LTV alone.

There are some very basic requirements all loans must meet. Only homeowners whose loans were sold to Fannie Mae or Freddie Mac before June 1, 2009 are eligible. And borrowers must be current on their mortgage, with no more than one 30-day late payment in the last year, and none in the most recent six months. Beyond that, individual lenders are free to add their own requirements (called "overlays") to these loans. That's where trouble may be brewing.

Wells Fargo, one of the nation's largest mortgage servicers and a major participant in the original HARP, has released its guidelines for HARP 2 loans, and they are more restrictive than some in the industry were expecting. Wells Fargo will not refinance mortgages for homeowners whose loans they do not currently service if the amount of the primary mortgage is greater than 105% of the home's value, and the combined loan-to-value (the first mortgage plus any second mortgage or home equity line of credit) is greater than 110 percent.

"Those guidelines are worse than the original HARP," says Joe Kelly, founder of YouCanRefi.com, referring to the caps for non-Wells Fargo customers. His firm has specialized in HARP loans since the original program launched and, like many mortgage firms, and he says he has high hopes for the HARP 2 program.

This news is significant because of the major role that Wells Fargo plays in the mortgage industry. Wells Fargo originated 31% of all residential mortgages in the fourth quarter of 2011, explains Guy Cecala, publisher of Inside Mortgage Finance. He adds that they are also "one of the top refinance mortgage producers in the country. Last year they accounted for 24.4% of all refinance mortgages made. That, of course, included a lot more loans than just the ones they service themselves."

That also means that many mortgage firms may have been counting on being able to help their clients refinance high LTV loans by putting them into HARP 2 loans through Wells Fargo. (There are numerous lenders across the country who broker for, or sell loans to Wells Fargo.) But those hopes may be dashed by this latest news. On the other hand, homeowners whose loans are currently serviced by Wells Fargo may have reason to cheer. The guidelines for refinancing their loans are very generous, with few limits on LTVs or minimum credit scores.

"It basically means I can help someone whose loan is with Wells and has, say, a 180% LTV on his condo in Florida with a 600 credit score," says Kelly.

[Related Story: Will Obama's Mortgage Plan Work?]

Will HARP 2 Live Up to the Hype?

Other lenders who have released their guidelines are focusing on offering the program to their own customers. Last week, a Bank of America spokesperson was quoted in a Bloomberg article as saying the bank "is fully committed to providing our customers with the benefits of refinancing through our continued implementation of HARP 2." (Italics added.) Mark Rodgers, director of public affairs for Citi declined to provide specifics, but said that, "Although the program is relatively new, we are seeing success helping borrowers to lower their mortgage payments."

So it's not all bad news. After all, even if the major servicers extend HARP 2 just to their own customers, the program could still help a significant number of homeowners. According to Cecala, Wells Fargo services 17.7% of existing residential mortgage loans, followed by Bank of America (17.2%), Chase (11.4%), Citi (5.2%) and Ally Financial (3.7%). Together, those top 5 lenders service just over half of current residential mortgages. But what about borrowers whose servicers decide not to participate in HARP 2, or who set significant restrictions on the loans they will refinance? A lender may agree to participate in HARP 2, for example, but then set low caps on loan-to-value ratios, the way Wells Fargo has for non-customers?

"One of the things we saw under HARP 1 most of the refinance activity was at 105% (LTV) and that didn't help that much," observes Cecala. "What's going to make it better under HARP 2?" Another problem: borrowers may be stuck with their current servicers, regardless of how good (or not so good) they are at closing their loans. One of the goals of HARP 2 is to encourage competition, explains Cecala, and if lenders limit the program to their existing customers, that won't happen.

"Somewhere in the neighborhood of 90% of borrowers refinance with someone (other than their current mortgage lender). You go with whomever is offering the best loan and there is some competition, but that's not the case with the HARP program," he says.

Still, Cecala remains "cautiously optimistic" about the program. So does Kelly, who points out that some lenders have yet to release guidelines. Indeed, as I was finalizing this story, Kelly told me he received a flyer from a lender promoting HARP 2 loans with no caps on the loan-to-value ratio. "Not everyone is following (Well Fargo's) lead," he notes.