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A number of Denver lending experts are skeptical that the Obama Administration’s latest effort to combat foreclosures will be a big help to the local market.
On Monday, the Obama Administration announced it is revamping the Home Affordable Refinance Program, or HARP, to allow some consumers current on their home mortgage to refinance, no matter how much they are underwater on their loans. The streamlines mortgage process typically will not require an appraisal and the underwriting is not as strict as for a typical refinance.
Obama outlines plan
Speaking in Las Vegas, President Obama outlined how the new program will work.
“Number one, the barrier will be lifted that prohibits responsible homeowners from refinancing if their home values have fallen so low that what they owe on their mortgage is 25 percent higher than the current value of their home. And this is critically important for a place like Las Vegas, where home values have fallen by more than 50 percent over the past five years,” Obama said.
“So let me just give you an example,” the President continued. I”f you’ve got a $250,000 mortgage at 6 percent interest rates, but the value of your home has fallen below $200,000, right now you can’t refinance. You’re ineligible. But that’s going to change. If you meet certain requirements, you will have the chance to refinance at lower rates, which could save you hundreds of dollars a month, and thousands of dollars a year on mortgage payments.
“Second, there are going to be lower closing costs, and certain refinancing fees will be eliminated — fees that can sometimes cancel out the benefits of refinancing altogether, so people don’t bother to refinance because they’ve got all these fees that they have to pay. Well, we’re going to try to knock away some of those fees.
“Third, there’s going to be more competition so that consumers can shop around for the best rates. Right now, some underwater homeowners have no choice but to refinance with their original lender — and some lenders, frankly, just refuse to refinance. So these changes are going to encourage other lenders to compete for that business by offering better terms and rates, and eligible homeowners are going to be able to shop around for the best rates and the best terms.
“So you take these things together, this is going to help a lot more homeowners refinance at lower rates, which means consumers save money, those families save money, it gets those families spending again. And it also makes it easier for them to make their mortgage payments, so that they don’t lose their home and bring down home values in the neighborhood.
“And I’m going to keep on doing everything in my power to help to stabilize the housing market, grow the economy, accelerate job growth, and restore some of the security that middle-class families have felt slipping away for more than a decade.”
However, there are restrictions. The borrower’s loan must be backed by Fannie Mae or Freddie Mac. And the borrower must have made at least the last six mortgage payments and can have no more than one missed payment during the past 12 months, according to the Wall Street Journal. The borrower also must have a job or a regular source of income.
It sounds good in theory, but these programs seldom have the desired impact, said Jim Lewis, a managing director of America’s Mortgage, based in Wheat Ridge. The Federal Housing Finance Agency estimates that the program could help 800,000 to 1 million borrowers nationwide. HARP, created in 2009, is part of the government’s Making Home Affordable program. Colorado consistently has represented 1.4 percent of Making Home Affordable. If that trend continued and HARP met its targets nationally, conceivably about 11,200 to 14,000 homeowners in Colorado could be helped by HARP.
“My experience with the government trying to social-engineer these programs is less than favorable,” said Lewis, who works out America’s Mortgage Tech Center office. “The government intervention into private industry typically breeds ineptitude. I do not think, generally speaking, the government doesn’t do anything to assist homeowners.”
In any case, he said a revamped HARP doesn’t address the real problem, which is boosting home sales. Increasing home sales is far more important than increasing refinancing, as far as the housing market and the overall economy, he said. Even historically low mortgage rates – currently at 4.11 percent for a 30-year mortgage, and briefly below 4 percent a few weeks ago – haven’t done much to get people to sign on the dotted line, he said.
Dan Brown, principal of Spire Financial, said it is no accident that President Obama made the announcement of what he hopes is a new and improved version of HARP in Las Vegas, one of the cities hardest hit by foreclosures.
“He is unrolling it out in Las Vegas, where it is a big issue, as far as how far home values having fallen, as it is in Florida, and places like Michigan,” Brown said. Lenders already can refinance mortgages up to 125 percent of the loan-to-value of the home. So if the mortgage is $125,000 and the home is only worth $100,000, they could still potentially get a lower rate.
“I could see (the revamped HARP) offering some relief in really terrible real estate markets,” Brown said. “In some places, you might have a $200,000 loan and the home is only worth $100,000. That is just not the case in Denver. This is a Band-Aid for a gaping wound.”
Peter Lansing, president of Universal Lending, said that if the program can help people refinance who could not before that is great, because a high mortgage has been one of the factors, in some cases, that has resulted in foreclosure. Also, the extra monthly savings could put more money in their pockets, which could give the economy a boost. (Universal Lending is a sponsor of InsideRealEstateNews.)
One improvement is that homeowners with no equity in their homes can shop around with other lenders to get the best rate, he said. In the past, borrowers seeking HARP loans were basically forced to deal with their servicers – typically big banks such as Bank of America, Wells Fargo, or Citigroup that process the monthly mortgage payments – and they were so inundated that they didn’t have the ability to deal with everyone who needed help.
“They already are so strapped, that to ask them to spend more money to help more people, just doesn’t make any sense,” Lansing said.
Devil in the details
Still, the question remains will lenders be compensated enough that it is worth it to them to help consumers get a lower rate, he said. “The problem is that whenever any Administration – not just this one – unveils something new, they don’t give you the guidelines or the details. And is always the case, the devil is in the details.”
Also, Lansing noted that the vast majority of borrowers use their equity in their homes to pay for the cost of refinancing. It’s unclear whether they will be allowed to do that when they have no equity in their homes.
That may not be a good idea, said Shannon Peer, director of housing counseling at Brothers Redevelopment, the non-profit group that runs the Colorado Foreclosure Hotline. Peer agreed with Lansing that a key to the program’s success will be the details and guidelines that are expected to be released in the coming weeks and months. Fannie and Freddie hope to release technical details by Nov. 15, and banks are expected to start taking applications around Dec. 1.
“Let’s say you’ve got a $125,000 mortgage and that is more than what your house is worth,” Peer said. “All of a sudden if you add $5,000 to the mortgage in closing cost, the borrower just may have made the situation worse.”
He said if he took a “snapshot” of people who seek free counseling from Brothers Redevelopment, the revamped HARP would help a relatively small number of people in distress.
“We do see some people who have 6.5 percent to 7 percent mortgages,” Peer said. “Refinancing for some people could save them $400 or more per month. But I would say the vast majority of people we see currently have loans in the 5 percent to 6 percent range. Dropping it down to 4 percent or 4.25 percent would help a bit. And of course, this will not help the unemployed at all.”
He said the government might even want to ease its restrictions a bit more, as it is not unusual for people to have missed more than one payment in the past year, if they are struggling to keep their home, which adds late fees to the mortgage payment. “If you’re paying an extra $100 or $200 a month, it can really bust a budget for a lot of people,” Peer said.
Still, the program already has sparked some interest.
“We had one borrower who heard about it and called us first thing in the morning,” Peer said. “So we’re putting him in touch with a counselor to talk it over to see if it can help him.”
Liniger a fan
David Liniger, the co-founder of Denver-based RE/MAX International, applauded the administration’s move through executive means calling it “the right action at the right time.”
“The problems in the housing market have to be addressed to further economic recovery and it means taking aggressive action. We can’t wait,” said Liniger, who has met with government and industry officials throughout the year, and has been an outspoken proponent of housing initiatives coming out of Washington, D.C. “This type of reform is crucial in getting help for diligent borrowers, giving homeowners who have a chance to reduce their payments and save their homes the means to do so. We can’t afford a higher inventory of homes on the market right now. Something needs to be done and this will certainly help.”
Ron Woodcock, a broker with RE/MAX Southeast Inc., couldn’t disagree more.
“I think is a disaster,” Woodcock said. “I think it is insane. I think everything the government does is a dismal failure. I think all of these programs just bog down the system. The system is already broken, so does it make sense to thrown another wrench into it? These programs are continuing to destroy our real estate market.”
While a homeowner with no equity in his home with a 6 percent loan might be able to save hundreds of dollars each month by refinancing into a 4 percent loan, Woodock said if the government is seen as basically “doing cram-downs,” that is, forcing investors to accept lower yields, it will have dire consequences on the availability of money for making home loans. “This is going to discourage investors from investing in real estate loans, if the government can step in and say, “screw you,” and force you to lower the mortgage rate.”
Not a silver bullet
David H. Stevens, president and CEO of the Mortgage Bankers Association, said the changes to HARP are welcome.
“The mortgage industry welcomes these changes designed to help more underwater borrowers who are current on their mortgages refinance at today’s historically low interest rates,” said Stevens, the former director of the FHA, who began his lending career in Denver, after graduating from the University of Colorado Boulder. “Not only will these changes allow more borrowers to qualify, but they will streamline the process and reduce the cost to borrowers and should lessen risk for Fannie Mae and Freddie Mac. Lenders are particularly gratified that the refinements will provide relief from some representations and warranties that lenders face when originating new loans. These changes alone should encourage lenders to more actively participate in HARP.”
Still, Stevens said borrowers need to be patient, as even after the operational details are released, it will take some time for lenders to understand and implement the new rules.
“While ultimately helpful, these changes are not going to be a silver bullet to solve all the issues facing our housing market and borrowers who owe more on their mortgages than their homes are worth,” Steven said. “But they will offer lenders another tool to help borrowers and hopefully help bring some stability to housing markets, particularly those most impacted by home value declines.”
Obama said he understands this will not solve the nation’s housing crisis and more needs to be done.
Now, let me just say this in closing. These steps that I’ve highlighted today, they’re not going to solve all the problems in the housing market here in Nevada or across the country. “Given the magnitude of the housing bubble and the huge inventory of unsold homes in places like Nevada, it’s going to take time to solve these challenges,” Obama said. “We still need Congress to pass the jobs bill. We still need them to move forward on Project Rebuild so we can have more homes like this, and wonderful families having an opportunity to live out the American Dream.
“But even if we do all those things, the housing market is not going to be fully healed until the unemployment rate comes down and the inventory of homes on the market also comes down,” the President said.” But that’s no excuse for inaction. That’s no excuse for just saying “no” to Americans who need help right now. It’s no excuse for all the games and the gridlock that we’ve been seeing in Washington.”
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