On Monday President Obama announced a new program to help many underwater mortgagors refinance to lower rates. The details will not be out until November 15th, but this seems to be a modification of the Home Affordable Refinance Program (HARP). The expected changes include removing the 125% cap (previously the home was not eligible if the mortgage balance exceeded 125% of the current market value), lowering or removing risk based fees regarding loan to value and credit scores, and waiving certain representations and warranties that lenders commit to in selling loans to Fannie Mae or Freddie Mac. The plan applies to all mortgages that were purchased by Fannie Mae and Freddie Mac before May 31, 2009 and is available until the end of 2013. Mortgage payments must be current (with no late pays in the past six months and no more than one late pay in the past 12 months) and the borrower has to qualify based on current income.
Once the federal government began bailing out privately held Fannie Mae and Freddie Mac in September of 2008, the taxpayer assumed the default risk for these mortgages. Therefore it only makes sense to lower risk by lowering the payments. These mortgages are all seasoned (over one year old), are current, and have a reasonable payment history. The current home value has no bearing on the borrowers ability to make the payment. The only thing that matters is the current mortgage payment. It goes to reason that reducing a borrowers monthly payment reduces the chance of default. Also, borrowers are encouraged to shorten the term which will build equity faster which also reduces the risk to the government.
Considering that Fannie Mae and Freddie Mac own over $5 trillion of mortgages, and 22% have a balance that exceeds the current market value, the potential interest savings are huge. However, instead of just tweaking a marginal program (HARP has helped less than one million borrowers), what they really need to do is look back about 25 years to the FHA streamline refinance mortgage that has helped millions of people lower their payments. This program allowed refinancing without any income or credit qualifying and without an appraisal. As long as the interest rate and payment and or term were reduced and the mortgage was current, the refinance was allowed. The thinking was if a borrower is qualified at a six or seven percent loan, they are even more qualified at a four or five percent loan. Pretty simple, pretty effective, and would most certainly reduce the risk to the taxpayer.
Guest Author Randy Kelly is a Mortgage Banker and Finance Author with Peoples Mortgage. You can reach him online anytime by clicking here.
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