Some weeks ago, we had a post on here about the announcement of the HARP II loan program, which would modify the first HARP program and broaden the base of eligibility for home refinance.  Last week, Fannie Mae and Freddie Mac released the official guidelines for the program. What follows is a review of the HARP program and a few of the specific changes that are expected to make a difference.

In 2005, the San Luis Obispo county median home price peaked at $581,305. Six years later, the median home price has fallen to $354,842. As home prices drop, a number of homeowners have found themselves owing more than their home is worth. Nationwide, 11 million home loans are underwater.

Meanwhile, interest rates have fallen to the lowest they have ever been. This drop has been a problem for homeowners that want to refinance to lower rates. Banks look at the loan-to-value (LTV) ratio when determining loan qualification and this has left a number of homeowners unable to refinance, even though they are current on payments. 

Enter, HARP. The Federal government passed its Home Affordable Refinance Program in March 2009 to help responsible borrowers who were current on mortgage payments but could not refinance due to an underwater loan. HARP was expected to reach 5 million underwater borrowers, but only reached 894,000.

The FHA went back over the program to fix the issues, and recently made a number of changes in an attempt to address the problem. This is HARP II. 

HARP II was reformed to be more effective than HARP I because it broadens the base of eligible borrowers by eliminating the loan-to-value ceiling of 125 percent, and incentivizes lenders to accept this base by relieving underwriting stress.

One important issue to make note of... for a LTV greater than 125 percent, refinancing will not be available until March of 2012.  For more information on your status here, give us a call at 805.543.LOAN.

The major change made to help lenders was to remove the representation and warrants requirement, which is a fancy way for saying that lenders have been responsible for mistakes during underwriting. This makes lenders reluctant to take the risk of underwriting an underwater loan, because in the case of a mistake, they must take on the cost.  In theory, by removing the reps and warrants rule, lenders will be more likely to underwrite loans with a high LTV.

HARP II is designed to help responsible borrowers refinance despite an underwater loan. Following are some program guidelines.

Guidelines:

No mortgage delinquency in the past 6 months and only one in the past 12 months.

Eliminate loan-to-value ceiling. The previous maximum was 125 percent.

Must re-qualify if payment increases by more than 20 percent.

Borrower benefit requirement. Must reduce monthly payment, reduce interest rate, or reduce the loan amortization term.

Allows for refinancing for the purpose of reducing monthly principal and interest payment.

The program will expire on December 31, 2013.