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No Relief for Homeowners Shut Out by U.S. Refinancing Overhaul

Marc and Emily De La Torre would love to lower their mortgage bills to offset the costs of raising their 3-month-old baby. Instead, they’re among millions of Americans left out as the government tries again to make refinancing possible for borrowers with little or no equity.

The couple bought their Bonney Lake, Washington, property in July 2009, two months too late to be eligible for the federal Home Affordable Refinance Program, or HARP. Blocked from conventional refinancing after the house fell in value, the De La Torres can’t take advantage of record-low loan rates that have been a boon for other homeowners.

“It stinks that we’re right on the border of it,” said Marc De La Torre, a 30-year-old computer programmer whose wife left her job after the birth of their daughter, Cassie. “It’s an arbitrary date.”

The Obama administration this month started a new version of HARP after the original program helped less than a quarter of the people targeted to lock in lower rates. In designing what’s being called HARP 2.0, regulators sought to avoid disrupting the mortgage-bond market and putting too much taxpayer money at risk. Their balancing act, which included not extending the cutoff date, will limit the plan’s impact because millions of borrowers remain ineligible or may qualify only at rates that would yield minimal savings.

Low-Hanging Fruit

HARP’s effectiveness is directly tied to the number of homeowners who take advantage of it, according to Christopher Mayer, a real estate professor at Columbia Business School in New York. Removing barriers to refinancing has the potential to spur economic growth by freeing up spending money and to help stabilize housing by reducing defaults, he said.

“This is better than where we were, but once we’ve conceded that we’re going to do this program, we should make it as attractive as possible,” said Mayer, who has worked on a proposal for a more expansive refinancing plan. “They’ve done some of the hardest things, but then severely limited the number of consumers who can benefit. This is low-hanging fruit that is being left on the vine.”

HARP 2.0 cuts risks for lenders while lowering fees for borrowers and allowing them to refinance no matter how much their home’s value has dropped. In the third quarter, about 29 percent of borrowers were “underwater,” or owed more than their properties were worth, according to real estate data provider Zillow Inc.

Program Exclusions

The new program, like its predecessor, is open to the almost 50 percent of U.S. loans owned or insured by government-backed Fannie Mae and Freddie Mac. It keeps in place rules that disqualify borrowers whose loans were sold to those companies after May 31, 2009. Also excluded is anyone who was late with more than one payment in the past year or who is unemployed.

According to government estimates, it may help about 900,000 additional borrowers, doubling the current number of loans that have been refinanced.

A study by the Congressional Budget Office released in September showed a more aggressive program that didn’t have the May 2009 cutoff and included deeper cuts to fees would result in about 2.3 million additional HARP refinancings, based on data included in the paper.

Meg Burns, a senior associate director at the Federal Housing Finance Agency, the government regulator that oversees Fannie Mae and Freddie Mac, said HARP isn’t for borrowers who are struggling to make their payments. Those homeowners would be better off seeking loan modifications or payment holidays than paying extra refinancing-related costs such as those for new title insurance and closing agents.

Deadline Rational

Lifting HARP’s cutoff date would have increased administrative costs without providing a significant benefit, according to Burns.

“Rates are generally very low for those borrowers already,” she said. “And at a certain point, once you pay the closing costs, the slight reduction in your rate might not be really worth your while.”

The cutoff date may also prevent a surge of homeowners seeking small payment decreases from crowding out borrowers who could save more significant amounts. Following staff cuts in the mortgage industry earlier this year, lenders’ capacity to handle applications already “may have hit its limit,” Morgan Stanley analysts said in a Dec. 2 report.

The De La Torres, who owe about $250,000 on their three-bedroom property, might save about $133 a month if they were able to lower the interest rate on their 30-year mortgage from 4.9 percent to 4 percent. They can’t qualify for a traditional refinancing because they may have less than 5 percent equity. Home values in Bonney Lake, about 40 miles (65 kilometers) south of Seattle, have fallen about 20 percent since they purchased two years ago, according to Seattle-based Zillow.

Role of Equity

The average rate for a 30-year fixed loan fell from 5.3 percent in July 2009, when they bought the house, to 3.94 percent last week, matching the lowest level on record, according to data from Freddie Mac.

HARP was designed to help borrowers like the De La Torres because it exempts them from having to obtain mortgage insurance. While Fannie Mae and Freddie Mac typically require the policies for homeowners with less than 20 percent equity to reduce potential foreclosure losses, insurers often don’t offer them to anyone with less than 10 percent equity.

Under the expanded HARP, households with lower credit scores or more than 25 percent negative equity may have to pay rates so high they reduce or eliminate any potential savings they would receive by refinancing. Lenders must pay surcharges to the government-sponsored mortgage companies when refinancing borrowers with weak credit scores or high loan-to-value ratios, and those costs may be passed on to consumers.

Bank Rules

HARP 2.0 eliminates the fees for borrowers who switch to shorter-term mortgages, which come with larger monthly payments. The cost of refinancing all other borrowers with low credit scores who live in their properties are reduced but not eliminated.

HARP is voluntary, and banks that participate often follow their own rules that are stricter than the guidelines provided by Fannie Mae and Freddie Mac. The process can be frustrating for consumers.

Karen Kopacz, a 40-year-old resident of St. Paul, Minnesota, who has a 30-year mortgage with a 6 percent interest rate, said she applied to her bank three times in less than two months and each time got a different answer. She said Bank of America Corp. in late October said she didn’t qualify because she had a second lien, which she took on when purchasing the two-bedroom house six years ago to avoid making a down payment.

‘No One Understands’

On Nov. 21, a bank representative offered her a 5.375 percent rate. And on Dec. 13, another employee offered to qualify her for a 4.5 percent rate under the old HARP rules. Bank of America, like most lenders, hasn’t yet implemented much of HARP 2.0.

Kopacz, who owes $148,484 on the house she bought in 2005, is about 20 percent underwater on the first lien, based on a $121,600 home value given by Zillow.

“It’s very confusing,” said Kopacz, who started a blog, called Making Sense of Harp, to document her experiences. “No one understands what the HARP qualifications actually are, even the bank employees.”

“Bank of America had previously made product adjustments to ensure a more predictable customer experience,” Terry Francisco, a spokesman for the Charlotte, North Carolina-based company, said in an e-mail. “Today, those adjustments are no longer in place and we are providing eligible customers with competitive options on a full range of products to meet their refinancing needs.”

Good Compromise

The bank has funded about 200,000 HARP loans since the start of the program in 2009 and supports the changes made by the government, according to a Dec. 16 statement.

Bill Roth, co-chief investment officer of Two Harbors Investment Corp., a real estate investment trust that buys home-loan assets, said the government’s plan balances the interests of existing homeowners, property buyers and mortgage investors.

Eliminating all refinancing barriers, such as the HARP cutoff date, would drive up new-loan costs for all borrowers by roiling the mortgage-bond market, according to Roth. That’s because debt investors demand higher yields when they’re uncertain about how many borrowers will pay off their loans ahead of schedule, causing unforeseen losses.

“If you have a situation where the rules are going to change continuously, then whatever you do is going to be self-defeating because the mortgage rates are going to go up,” he said.

Case for More

Mortgage bondholders were initially concerned that an expanded HARP would trigger a flood of refinancing. The difference between yields on Fannie Mae securities that guide new loan rates and 10-year Treasuries jumped from 1.03 percentage points on Aug. 15 to 1.21 percentage points on Nov. 23, according to data compiled by Bloomberg. The spread fell as low as 0.94 percentage point this month as bond buyers determined the impact of HARP 2.0 would be limited.

Deborah Lucas, a finance professor at the Massachusetts Institute of Technology Sloan School of Management, said a wider refinancing program wouldn’t have a significant impact on mortgage rates.

“The administration could have gone bigger,” said Lucas, a co-author of the Congressional Budget Office study of HARP. “When we take out a 30-year mortgage, we’re allowed to pay it back any time without a penalty. That’s the way the contract is written. That ability to pay it back whenever you want is always costly to investors because people tend to refinance when rates have fallen.”

‘Great Leaps’

Loosening the rules further would reduce risks for taxpayers by making it less likely that some borrowers will default, said Joseph Gagnon, a former Federal Reserve economist and a senior fellow at the Peterson Institute for International Economics in Washington.

“The government is already on the hook,” Gagnon said. “If you lost your job, the government will lose anyway. But the government is less likely to lose if you can get a lower payment.”

Mayer, who criticized HARP 2.0 for not going far enough, said it makes “great leaps” in addressing a key roadblock: bank participation.

Many lenders have been hesitant to refinance underwater mortgages, especially those taken out by borrowers with weak credit, because of concerns that Fannie Mae and Freddie Mac will force them to buy back loans that default because of underwriting flaws on the original mortgage, said Sandipan Deb, mortgage-backed securities analyst for Barclays Capital in New York. Only 8 percent of HARP loans through the third quarter of this year were more than 5 percent underwater, according to data from the Federal Housing Finance Agency.

Looser Rules

The new rules address the problem by not requiring that the old loan be evaluated for underwriting issues as long as a pattern of fraud didn’t occur. Bank of America said this month that lenders are still hoping for a less “vague” exception, as well as other tweaks to what it takes to qualify borrowers.

And most mortgage insurers say they will waive rights to void coverage for most types of underwriting mistakes. Lenders have been turning away borrowers because of the costs and delays associated with transferring policies to the new loan.

The government, even under the new rules, may not sufficiently indemnify third-party banks that want to provide a HARP refinance for a mortgage they don’t service, said Jordan Eizenga, an economic policy analyst with the Center for American Progress in Washington.

Mortgage servicers may be more likely to participate more fully in HARP and offer better rates if they were concerned that borrowers could easily get loans refinanced by competitors, Eizenga said.

“Fannie and Freddie are acknowledging there are impediments,” Eizenga said. “But they don’t go 100 percent of the way to solving it.”

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