Do you personally know any borrowers who received a HARP 2.0 refinance?

  • No (85%, 79 Votes)
  • Yes (15%, 14 Votes)

Total Voters: 93

The revised Home Affordable Refinance Program (HARP 2.0) is taking more shots from its critics – this time from U.S. senators wanting to remove the competitive edge HARP 2.0 affords to lenders who originated the loan.

HARP 2.0 is a revision of the first HARP and applies to home loans owned by Fannie Mae and Freddie Mac (collectively, Frannie). HARP 2.0’s most significant change is the removal of the 125% loan-to-value (LTV) ratio to qualify for the refinancing program, though lenders are still able to impose their own strict LTV limits.

However, borrowers seeking to refinance under HARP 2.0 are essentially given the option of refinancing using their existing servicer, or using a different lender but paying prohibitively more or jumping through additional qualifying hoops. In many instances, the costs and rigmarole of going through a different lender are onerous enough to dissuade borrowers from seeking a refinance though other lenders, in some instances forgoing the program altogether.

Rolling the dice

HARP 2.0 gives a competitive advantage to the original lender in multiple ways. When a borrower refinances, the servicer takes on a certain amount of risk. The servicer must verify the borrower’s information and confirm the borrower meets Frannie’s underwriting requirements. If the borrower lied on their application or if the servicer made a mistake regarding the borrower’s qualifications, Frannie will refuse to purchase the loan, leaving the servicer stuck with the mortgage and unable to unload it on Frannie.

If a borrower refinances through the original servicer, the servicer does not have to take on that additional risk of submitting documentation again, as the borrower already “passed” Frannie’s inspection when the loan was originated. Essentially, the borrower has already passed muster and need not prove themselves a second time.

However, if a borrower refinances through a new servicer, the borrower’s information must be represented and verified all over again, starting the vetting process over from scratch. If the refinance includes an inverted LTV ratio (over 100%) or low credit score, the servicer is not likely to roll the dice and potentially end up stuck with an underwater mortgage. In fact, lenders surveyed that are unwilling to offer HARP 2.0 refinances cite this risk as the biggest deterrent, according to a recent survey by the Federal Reserve (the Fed).

Documentation of income can also be a cumbersome issue for borrowers, such as those who are self-employed. Thus, the prospect of collecting all that information to arrange a refinance with a new servicer deters them from shopping around, to their own financial detriment.

Pleased to offer buy downs

Many large lenders, such as Bank of America (BofA) and Chase, will not even offer HARP 2.0 refinances if they did not service the existing loan. Others maintain low LTV ceilings as a risk deterrent measure. Those banks offering to refinance new customers under HARP 2.0 often require a buy down, only agreeing to refinance if the borrower pays off a certain amount of the loan balance to bring the LTV to an acceptable level, or pay additional points upfront. In many cases, this results in thousands of dollars the borrower wouldn’t otherwise pay under their existing servicer.

This means servicers of existing loans with an inverted LTV have a monopoly on refinances – and are thus able to inflate HARP 2.0 refinance fees. This dynamic is something lenders are clearly aware of, and they’ve pumped up their fees accordingly.

Related article:

HARP strikes back, but will lenders conform?

The program’s critics are pushing what they call the Responsible Homeowner Refinancing Act, which would remove some of the unequal advantages and profits big banks currently receive by promoting competition. It is through increased lender competition that refinance fees will be lowered to the advantage of distressed borrowers.

first tuesday take

While HARP 2.0 made a step in the right direction by removing Frannie’s 125% LTV ceiling, it is meaningless as long as lenders (read: all lenders) continue to impose their own strict LTV limits and discretionary fees. Under the current system, HARP 2.0 refinancers are always going to find the best deal through their existing lender – and the existing lender damn well knows this.

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Fair lending now

At this point, HARP 2.0 is not living up to its full potential, though it is doing slightly better than its lightweight brother, HARP. A recent Congressional Budget Office study found for every 1,000 refinances, HARP 2.0 and otherwise, 38 fewer defaults occurred. Thus, the more homeowners who are able to afford to refinance under HARP 2.0, the fewer potential defaults will occur. Frannie (and the taxpayer) feel the loss of each home – a loss felt most acutely by former homeowners.

Re: HUD Secretary Shaun Donovan urges Congress to make refinancing easier from Los Angeles Times