Obama Administration Expands Refinancing Program

Underwater borrowers would be able to take advantage of historically-low interest rates under changes to HARP.
by | October 24, 2011

A program designed to allow distressed homeowners to refinance their mortgages will be vastly expanded in order to help underwater borrowers get better rates, Obama administration officials announced today.

The move comes as the administration continues to take on criticism over its response to the housing crisis. Many have said that the White House has failed to do enough to address Americans suffering under the weight of crushing mortgages at a time when the housing market is in dire shape. According to CoreLogic, a provider of real estate data, about 10.9 million residential properties, or 22.5 percent, are underwater.

The latest changes affect the Home Affordable Refinance Program (HARP) and are intended to help homeowners who owe more money than their property is worth achieve savings of $2,500 per year (on average) due to lower interest rates on their homes, said Housing and Urban Development Secretary Shaun Donovan in a conference call with reporters Monday morning.

The average rate on a 30-year fixed mortgage is 4.11 percent. But more than 40 percent of the most severely underwater borrowers are paying rates of at least 6 percent, according to CoreLogic.

Previously, homeowners who were more than 25 percent underwater weren’t eligible for HARP. That cap is lifted under the new changes “so that any borrower, independent of how deeply underwater they are, is eligible,” Donovan said. The program’s end date is also extended from June 2012 to the end of 2013.

President Obama initially announced his intention to expand HARP during his September speech announcing his jobs plan. Full details of the changes will be released Nov. 15, officials said.

The HARP program has suffered due to a paradox facing many homeowners. Despite historically-low interest rates, many borrowers have been unable to refinance their home loans because they are underwater. Lenders have been unwilling to take on risks associated with refinancing. Through August, Fannie Mae and Freddie Mac -- which own or insure half the country's residential mortgages -- have refinanced only 894,000 loans through HARP, despite the administration’s initially stated goal of aiding 4 to 5 million with the program.

Meanwhile, HARP isn’t the only housing program that’s come under scrutiny. The administration’s Home Affordable Modification Program, or HAMP, has offered permanent help to just 691,000 homeowners through August – nowhere near the administration’s goal of helping 3 to 4 million people though HAMP.

Administration officials – likely wary of making predictions, given past the previous records of HAMP and HARP – declined to tell reporters how many new borrowers would become eligible for HARP as a result of the changes.

The announcement is part of the administration’s “We Can’t Wait” campaign, which will feature executive actions designed to improve the economy in the wake of the failure of the president’s jobs legislation to gain traction in Congress. White House Communications Director Dan Pfeiffer said the next step in that campaign will be an announcement Wednesday in Denver regarding student loans.

“This is not a substitute for the Americans Jobs Act,” Pfeiffer said. “But it is an effort. We’re going to do everything we can. Where Congress won’t act, this president will.”

In addition to making severely underwater borrowers eligible, the changes will reduce the cost of refinancing by lifting various costs and fees associated with the process, according to administration officials. Part of that effort will include reducing the number of borrowers who need to pay for costly appraisals before securing refinancing.

One of the biggest obstacles the private sector faces in refinancing existing loans has been the “representations and warranties” that a borrower’s original lender had to Fannie Mae and Freddie Mac. Essentially, the original lender guarantees the quality of the underwriting of that loan. That has made competing lenders hesitant in competing to refinance, for fear of taking on those liabilities. The agency that oversees Fannie and Freddie will eliminate those requirements under the new program.

“This will unleash competition… it will give a far greater incentive for the original bank that is currently holding the mortgage to pre-emptively offer these families a competitive rate,” said Gene Sperling, director of the National Economic Council.

The changes to HARP will only benefit homeowners whose mortgages are owned or insured by Fannie Mae or Freddie Mac, which are currently under federal government conservatorship. Administration officials say similar programs might be developed for other borrowers as part of the ongoing settlement negotiations between states and lenders.

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