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More Help for Underwater Borrowers?

November 10, 2011

On October 24, 2011, the Federal Housing Finance Agency (the “FHFA”) and Fannie Mae and Freddie Mac (the “GSEs”) announced an expansion of the Home Affordable Modification Program (the “HARP”), or so-called “HARP Phase II”, in an effort designed to assist additional “underwater” borrowers.

The FHFA and the Department of the Treasury instituted HARP in early 2009 as part of the Obama Administration’s Making Home Affordable program. HARP provides borrowers that have a depressed home value the opportunity to refinance their mortgage into a lower interest rate loan.

While HARP is only one of several refinancing options available to homeowners, HARP is unique because it is one of the few refinance programs that allows borrowers who owe more on their mortgage than their home is worth to take advantage of a lower rate refinancing option.

The new program is limited to loans originated and sold to Fannie Mae or Freddie Mac prior to May 31, 2009.  One intriguing feature of the program is the limitation of required representations and warranties from lenders making such loans to the GSEs. This feature could lead to a reduction in repurchase demands for a certain segment of GSE loans refinanced under HARP Phase II.

Prior HARP refinances were subject to a maximum loan-to-value (LTV) of 125%. That limit has been removed for fixed rate mortgages; adjustable rate refinances are still subject to a maximum LTV of 105%. In addition to the lessening of representations and warranties, the removal of the upper limit on LTV ratios, and the current low-interest rate environment could provide this program momentum producing results beyond those of past HARP or other Making Home Affordable programs.

The GSEs plan to issue guidance with additional details about the program changes mid-November. Participation in HARP is not mandatory; therefore, mortgage entities wishing to participate will have time to review program amendments and implement necessary operational changes.

Eligibility criteria for HARP Phase II loans are as follows:

•The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae;
•The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009;
•The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009;
•The current loan-to-value (LTV) ratio must be greater than 80%; and
•The borrower must be current on the mortgage at the time of the refinance, with no late payment in the past six months and no more than one late payment in the past 12 months.

Other program features include:

•Certain agency fees will be waived if a borrower elects a shorter term with the new loan (for example, choosing a 20 year loan term when the prior loan had a 30 year term);
•If there is a reliable AVM estimate of value provided by Fannie Mae or Freddie Mac, a new appraisal will not be needed; if there is not a reliable AVM value, a new appraisal will be required; and
•Certain lender representations and warranties will be waived.

A copy of the FHFA release may be found here.

FAQs about HARP Phase II may be found here.

If you are underwater and want to explore your options, please contact me.

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