Dennis' Mortgage Blog

Part of President Obama's new stimulus plan is a plan to expand the ability of many home owners to refinance.  The plan has naturally come under some criticism and there are hearings on Capitol Hill today regarding the program which the Administration claims will help 30 million homeowners save up to $85 billion a year according to one estimate.  The proposal is to revamp the current Home Affordable Refinance Program (HARP) that is part of the Making Home Affordable program rolled out in 2009.

The proposal is to extend the current program which is for mortgages owned by Fannie Mae and Freddie Mac and revamp it so that it mirrors the long time FHA Streamline Refinance program.  The FHA Streamline program does not require an appraisal or income documentation--borrowers must only show they have income but not how much. 

By eliminating the income requirement many home owners who have either had a loss of income through the recession, either from reduced bonuses, overtime or spouses job, or those whose income was overstated on their original mortgage applications when Fannie and Freddie were approving stated income loans.

The lack of appraisal requirement will assist those home owners whose negative equity position exceeds the current 125% loan to value limit of the HARP program. 

The primary criticism of the program is that investors and the American taxpayer will be the ones who pay for the $85 billion in savings the homeowners will receive.  Taxpayers are involved since Fannie and Freddie losses are backed by the U.S. Treasury as well because the Federal Reserve purchased approximately $1 trillion in Fannie and Freddie Mortgage Backed Securities as part of QE2.

While this is correct on the direct savings from lower interest payments borrowers will be making and investors collecting, in the long run investors and taxpayers are securing themselves from bigger losses due to avoid defaults on many of these mortgages.  A significant number of defaults the past few years have been voluntary, or strategic, defaults by home owners whose mortgages exceed the value of their homes and who have interest rates far above the current market.  Unable to refinance to lower their payments they pull out their calculators and do the math to determine how much they would save per month by letting their home go to foreclosure, saving the monthly mortgage payment during the foreclosure process and then renting a new home.  By allowing these homeowners to reduce their payments to current mortgage rates hundreds of billions of dollars will be saved from the foreclosures that will be avoided.

Keep in mind that the program is not calling for lenders to write off tens of thousands of dollars in principal to their mortgages under a modification, the program is calling for a reduction in interest on those mortgages.  The principal remains intact and the borrowers are still paying on their mortgages, just at a lower percentage than they are paying now.  Further the interest collect far exceeds the comparable rate of return on U.S. Treasuries and for the past year exceeds the return on the stock markets.

Further, existing holders of Mortgage Backed Securities will not see their yields decline on the affected mortgages, instead they will get the money back on their investments as the mortgages pay off.  It will be up to the investor as to whether or not he wishes to roll his funds back into Mortgage Backed Securities at a lower yield.

In July in a teleconference with a senior vice president at Fannie Mae I asked why Fannie Mae did not have a refinance program that mirrored the very successful FHA Streamline Refinance program.  If the proposed restructuring of the HARP program goes through they will, and it will greatly benefit housing markets across the country.

If you are in a mortgage that is over 5% please contact me to investigate the savings you may be eligible for by refinancing.