The new HARP plan for underwater refinance not starting so well

A new version of a federal refinancing program designed to ease the financial pain of upside down homeowners has been embraced to various degrees by lenders, posing obstacles for prospective borrowers.

An expanded Home Affordable Refinancing Program called HARP 2.0, that the federal government announced in October was supposed to make it possible for homeowners with mortgages owned by Fannie Mae and Freddie Mac to refinance at today’s rock-bottom interest rates no matter how much more they owe on their homes than those homes are worth.

To qualify, homeowners must be current on their loan payments.

Previously homeowners whose mortgages exceeded their home market value by more than 25 percent could not refinance under the federal program.

However, prospective borrowers are discovering that some loan brokers are not as yet offering the program and some lenders are adopting guidelines that are more restrictive than Fannie Mae and Freddie Mac require to buy and guarantee the mortgages.

Fannie and Freddie are adopting more policies that will recapture losses on defaulted mortgages if the problem with due to the lender lack of underwriting checks.

Some lenders said they are adopting loan to value limits and setting their own minimum FICO scores for applicants because they fear that if the loans default in the future and mistakes are found in the loan underwriting, Fannie Mae and Freddie Mac will require them to buy the loans back at a substantial loss.

Some of the largest banks like J.P. Morgan Chase and Bank of America meanwhile have adopted policies to refinance only the mortgages that they currently service and not refinance the mortgages serviced by their bank competitors.

This makes prefect sense. Why is Bank A is going to transfer a risky from Bank B. Bank A is more liability and Bank B has better balance sheet.

Because banks are focusing on refinancing the mortgages they manage and are not competing for more business, the interest rates on the loans are not as low as they might be, said Laurie Goodman, senior managing director at Amherst Securities Group.

“This tends to lock a borrower into refinancing with their existing lender, which conveys tremendous pricing power to the banks, Goodman said.

The HARP program encourages the banks to behave in this manner, Goodman explained, because it shields them from liability for future defaults on loans that are refinanced only if they are already servicing the same mortgages.

She said the banks are taking advantage of the fact that other banks generally will not compete for their current customers “by charging higher rates to HARP 2.0 borrowers and…earning massive profits on originations.”

Because of the variations in interest rates and eligibility requirements, homeowners wanting a HARP refinancing would be wise to comparison shop, industry officials said.

“The consumer is scrambling because a lot of lenders are saying they are not doing HARP 2.0 the way it was announced by the president,” said Jeff Lazerson, president of Mortgage Grader, an online brokerage based in Laguna Niguel.

Lazerson said some of the interest rates his customers have been quoted for HARP 2.0 mortgages are “highway robbery pricing.” He said on a day he was quoting an interest rate of 4.5 percent, a customer told him another broker was quoting 5.25 percent.

Increasing the number of lenders that will do HARP refinancing would help homeowners obtain HARP mortgages faster and probably at a better rate than they can get from going to their servicing bank, according to several loan brokers.

On March 19 lenders other than the major banks were free to start submitting HARP 2.0 applications on Fannie and Freddie automated processing systems. But some have declined.

Paul Rozo, chief executive officer of Corona-based PRMG, one of the nation’s largest independently owned mortgage companies, said he is assessing the risks of participating. He said he is waiting for guidance from his capital partners and the investors to whom he plans to sell the mortgages.

Some brokers say they have plenty of homeowners ready to refinance as soon as they can find willing lenders. “We are left in limbo,” said Bob Rice, owner of First Secure Financial in San Bernardino and president of the California Association of Mortgage Professionals.

Wil Herring, owner of Mtg. Experts in Moreno Valley, said he was similarly waiting for his lenders to start doing HARP 2.0 loans. He said his first five customers in line could each save $200 to $300 a month if their current interest rates of more than 6 percent are lowered to a little more than 4 percent.

Other lenders have forged ahead. Christopher M. George, president of CMG Financial in San Ramon and incoming president of the California Mortgage Bankers Association, said he is doing HARP 2.0 refinancing with no loan-to-value cap and he believes lenders who are holding back are doing “a big disservice to the homeowner…I think it is partly because they don’t understand the product and are not set up to do it in a compliant manner,” he said.

Diane Piela, a 56-year-old former family physician who is disabled by multiple sclerosis, said she and a friend who is a professor at Mount San Jacinto College owe 38 percent more on the house they own in Menifee than its market value.

When Piela heard on the news that the HARP program had expanded, she went to a broker in Temecula who helped her and her friend apply for a CMG loan. “We just made an application and submitted all our financial information and we are waiting,” she said. They plan to use their anticipated $300 a month savings to pay other bills and build their savings.

That prospect, she said, “makes us feel much better about the future.”