Independent filmmaker De Veau Dunn tried to refinance his mortgage last summer to reduce his 6 percent interest rate. He didn’t qualify because he owed more than his home was worth. This spring, Dunn, who lives near San Diego, could proceed thanks to new rules in a federal program to help borrowers like him. He just closed on a new loan at 4 percent, saving $700 a month. “Seven hundred a month times 30 years—that’s a bit of a savings,” he says.
Dunn was lucky. While the Obama administration this year has introduced rules to encourage refinancing, their impact may be limited by banks’ stretched capacity to make loans and their concerns that borrowers are too risky. “The government keeps rolling out these wonderful programs, and it’s sometimes hard to find a bank that will underwrite to the government guidelines,” says Dan Green, loan officer at Waterstone Mortgage in Cincinnati. “There’s a disconnect between how the program is being touted and what a homeowner can actually receive.”
The Obama administration’s first attempt to help strapped homeowners came in early 2009 with the Home Affordable Refinance Program, which was supposed to help as many as 4 million homeowners whose loans are backed by Fannie Mae and Freddie Mac. It was aimed at borrowers with little equity or who were underwater. So far 1.3 million people have refinanced through HARP. In March a revised version, known as HARP 2.0—the program that helped Dunn—went fully into effect. It removed the limit on how far underwater a borrower could be. It also gave lenders protection against liability on loans they refinance for existing customers—which means Fannie and Freddie will not force them to buy back soured loans. In another attempt to spur refinancing, on June 11 the Federal Housing Administration reduced fees in its so-called streamline program, which allows borrowers who are current on their loans to obtain lower interest rates without income verification or appraisals.
The agencies in charge of the programs say they are pleased with the results so far. As of May, HARP refinances for underwater borrowers this year—78,273—had passed the number for all of 2011, according to the Federal Housing Finance Agency. “HARP 2.0 is accomplishing the goals set forth,” Edward DeMarco, acting director of the FHFA, said in a July 16 statement. The FHA is “continuing to see strong interest in the streamline product,” says Brian Sullivan, a spokesman.
Even so, many borrowers will be unable to refinance. Some lenders are demanding high credit scores or are asking for appraisals even on streamline refinances, according to Isaac Boltansky, a policy analyst at Compass Point Research & Trading, and other housing industry analysts.
Some lenders also are turning away applicants who owe far more than their home is worth. This year, about 4 percent of the HARP borrowers owed at least 25 percent more than their home’s value. Dunn’s mortgage broker, Justin Sheftell at Courtesy Mortgage, says many of his clients owe 50 percent or even 80 percent more than their home is worth, and he knows of only a handful of lenders that will consider refinancing such loans. “There are so few players willing to take the risk,” he says.
Prospective refinancers may find it hard to shop around. Lenders including Wells Fargo, JPMorgan Chase, and Bank of America have said they will accept FHA streamline applications only from clients whose loans they currently service, citing an inability to keep up with demand. Many banks also are turning away HARP applicants who are not current clients because they’re worried about liability if the loans sour. “The real limitation is that for one reason or another the programs seem to be limited to the existing servicer of your loan,” says Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. “The government really thought it could get around that and create more of a competitive market, but that really hasn’t happened.”