The Wall Street Journal published an article detailing some of the new changes, including a quote from your humble mortgage advisor, here: TWELVE QUESTIONS ON OBAMA’S REFI PLAN.

Major Highlights

• The FHFA’s announcement is intended to apprise homeowners of the pending changes.  The enterprises backing these loans (Fannie Mae and Freddie Mac) will take the next step in changing their written guidelines for HARP. These guidelines are slated to be issued November 15th of this year. The FHFA is hoping shortly thereafter that participating banks and lenders will change their policies to support the changes. The hope is that some of the changes are in effect by December 1st. To summarize, it will take a few weeks, and possibly a couple of months, for all of the changes to reach the consumer.
• The program will remove the current limitation on the appraised value of properties. There will no longer be a requirement that properties appraise for 125% of the loan value. This is great news for homeowners who live in some of the harder hit real estate markets. The FHFA is hoping this change will be in place sometime in the first quarter of 2012.
• HARP has now been extended until December 31st, 2013. This will give Fannie Mae, Freddie Mac and all the participating HARP lenders plenty of time to implement changes.
• Fannie Mae and Freddie Mac will waive certain representations and warranties that lenders commit to in making HARP loans. This could possibly be the biggest change made to HARP.  I’ll touch more on this topic later in this post.

Minor Highlights

• The program is reducing the cost of refinancing to shorter term loans. This is a great change as long as the 30-year loan stays affordable, as affordability is one of the key drivers in the HARP program. Many of my past readers know that I’m a big fan of the 15-year fixed mortgage, which I discussed in this post. The purpose of this change is to incentivize lenders to refinance to shorter term mortgages which will build the homeowner’s equity faster, but with the risk of slightly higher payment.
• HARP will expand the use of Automated Value Models (AVMs) in place of appraisals. Currently, approximately half of the HARP loans we originate utilize AVMs; increasing utilization of AVMs will ultimately lower the cost of refinancing for more homeowners.
• A small change to the eligibility dates for Fannie Mae backed loans means that if your loan is backed by Fannie Mae and you did a HARP loan between March 31^st, 2009 and May 31^st 2009, you are eligible for a second HARP refinance. This change will have no impact on Freddie Mac loans, and appears to be a move to align the date cutoffs between the two government-sponsored agencies.

Removing Lender Warranties…Why this a Big Deal?

In my opinion, this change could have the biggest implications.  To understand why, I’ll need to explain what this means.

When a lender originates a loan that is backed by Fannie Mae or Freddie Mac, they are basically creating a loan that is designed to be sold to one of these companies. When the lender sells the loan to Fannie Mae or Freddie Mac, they are often required to provide a “warranty” on the loan which, under certain circumstances, requires the lender to buy the loan back. These circumstances can include homeowner defaulting on the loan, incomplete loan packages, or improperly underwritten loans.

One of the biggest problems with HARP is that lenders have been reluctant to fully participate in the program due to the “warranty clause”. Even though HARP allowed lenders to finance up to 125% of the value on a first mortgage, most lenders would not lend to this value due to the risk of “warrantying” a loan on a house that was deeply underwater.  Most HARP lenders offered up to 105% of the home’s value unless the loan was already serviced by them. In short, many participating HARP lenders were unwilling to share the additional risk of HARP loans.

By removing parts of the lender warranties, Fannie Mae and Freddie Mac are taking on more of the risk. This will entice participating HARP lenders to be more liberal with their HARP programs, and to utilize the full spectrum of HARP.

Without this change, I believe all of the other changes would be rendered useless. Lenders already chose to participate in HARP on a limited basis.  Expanding the program to allow riskier scenarios and then asking the lenders to take on the additional risk would be a waste of time and energy. Removing the warranty requirement will empower lenders to participate fully in HARP, allowing the program to reach the full range of eligible homeowners. At the end of the day, these loans are already in the Fannie Mae and Freddie Mac portfolios, so these enterprises aren’t really taking on additional risk by allowing a refinance under any terms.

Closing Thoughts

Overall, I’m encouraged by these changes. I look forward to clarity on HARP loans with PMI, and I’m interested in how participation will increase with the relaxed warranty standard. The FHFA got a lot done in a short amount of time and I’m looking forward to seeing the changes put into practice in the coming weeks and months.

UPDATE 11/21/2012

In this update, I wanted to bulletpoint the changes to HARP for each agency (Fannie/Freddie) separately with timelines and thoughts.  There are many changes, so please filter the changes to which changes will impact you the most.  To do this, please first determine which agency owns your loan (you can learn more on how to determine this HERE).  Next, review the changes offered by your servicer (who you make your payments to) and what options are available with any lender who participates in HARP.  In some instances, it’s better to apply with your current lender or another lender based on guidelines.  If you qualify under both cases, you should then choose which option will give you the best pricing.

I’ve listed the changes based on the effective dates.  Next to each change, I’ve listed how this will impact the program in helping more homeowners qualify.  This is not to determine the importance of the change, only the impact it will make in helping more homeowners qualify for the program.  Here’s a list of the changes coming:

Fannie Mae Changes

Fannie Mae offers two versions of HARP labled “Refi Plus” for the current servicer or “DU Refi Plus” which any lender can do.  “Refi Plus” is the version you must go to your current lender to apply for.  “DU Refi Plus” is available to any Fannie Mae HARP lender.

Refi Plus

Changes effective December 1st, 2011

• Removal of the 125% loan-to-value limit (impact- Very High)
• 105% loan-to-value limit on ARM’s and loans amortized longer than 30 years (impact- Low)
• Permitting one 30-day delinquency within the previous 12 months provided the delinquency was not within the previous 6 months (impact- Low)
• Requalifying for the loan if there’s a 20% increase in payment (impact- High)
• Removal of Bankruptcy and Foreclosure waiting period (impact- Very High)
• Reducing the maximum fee adjustment on loans 20-years or longer to .75% (impact- High)
• Reducing the maximum fee for loans less than 20-years to 0% (impact-Low)
• Removal of lender representations and warranties (impact-Very High)

DU Refi Plus

Changes effective March 2012 (no specific date given)

• Removal of the 125% loan-to-value limit (impact- Very High)
• 105% loan-to-value limit on ARM’s and loans amortized longer than 30 years (impact- Low)
• Permitting one 30-day delinquency within the previous 12 months provided the delinquency was not within the previous 6 months (impact- Low)
• Requalifying for the loan if there’s a 20% increase in payment (impact- High)
• Removal of Bankruptcy and Foreclosure waiting period (impact- Very High)
• Reducing the maximum fee adjustment on loans 20-years or longer to .75% (impact- High)
• Reducing the maximum fee for loans less than 20-years to 0% (impact-Low)

Reference:

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2011/sel1112.pdf

Freddie Mac Changes

Freddie Mac offers two versions of HARP labled “Same-Servicer” or “Open-Access”.  “Same-Servicer” is the version you must go to your current lender to apply for.  Open-Access is available to any Freddie Mac HARP lender.

Refi For changes on the “Same-Servicer” HARP loan from Freddie Mac, the changes are occuring on certain timelines. Loans applied after December 1st, 2011 and closed after January 3rd, 2012

• Removing lender representations and warranties (impact- Very High)
• Extending expiration of HARP until December 31st, 2013 (impact- High)
• Adding a Borrower benefit provision for reducing the monthly payment (impact- Low)
• Requiring that at least one Borrower have a source of verified income (impact- Low)
• No longer permitting determination of property value based on the appraisal or Automated Valuation Model of the loan being refinanced (AVM) (impact- Moderate)
• No longer permitting determination of property value based on new AVM (impact- Moderate)
• Permitting one 30-day delinquency within the previous 12 months provided the delinquency was not within the previous 6 months (impact- Low)
• Removing the requirement that the occupancy of the Mortgage being refinanced and the occupancy of the new HARP loan be the same (impact- High)
• Freddie Mac is lowering their maximum fee adjustment from 2% to .75% on primary residence and second homes only.  Investment properties will remain at 2% (impact- High)
• There is no adjustment for loans amortized less than 20 years.  This means any 10-year or 15-year HARP loan for Primary Residences or Second Homes will have zero price adjustments (impact- Moderate)

Loans applied after December 1st, 2011 and closed after June 1st, 2012

• All Fixed Rate HARP loans will increase their loan-to-value limit from 125% to no-limit (ARM’s will stay at 105%)

OPEN-ACCESS

Loans applied for after December 1st, 2011 and closed after January 3rd, 2012

• Extending expiration of HARP until December 31st, 2013 (impact- High)
• Adding a Borrower benefit provision for reducing the monthly payment (impact- Low)

Loans applied for after December 1st, 2011 and closed after March 15th, 2012

• Loan Prospector (Freddie Mac’s underwriting engine) will be updated to allow higher loan-to-value limits above 125% (impact- Very High)
• Loan Prospector will be include HVE’s (Home Value Explorer) estimated values without an appraisal, allowing more loans to be approved without an appraisal (impact- Very High)

Loans applied for after December 1st, 2011 and closed after June 1st, 2012

• All Fixed Rate HARP loans will remove the 125% LTV limit (impact- Very High)

Reference:

http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1122.pdf

Freddie Mac made the Same-Servicer HARP loan (the version only your current lender can do) extremely different than the Open-Access HARP loan (the version any Freddie Mac lender can do).  This has caused misinformation resulting in homeowners being turned down for a loan they should qualify for.

In this post, I’m going to discuss some of the pitfalls related to refinancing a Freddie Mac HARP loan on an investment property and how to avoid them.

PITFALL #1- My lender tells me HARP is only for a property I live in

This is easily the most common reason homeowners are turned down.  For most homeowners, this is not true.  However, the lender may not participate in HARP loans for investment properties.

One of the reasons this happens is because homeowners usually call their existing lender for a HARP loan.  The Same-Servicer Freddie Mac HARP loan does not allow a homeowner to change occupancy, so if the loan was originated for a homeowner who later converted the property to a rental, they are ineligible for this version of HARP.  However, the Freddie Mac Open-Access HARP loan DOES allow for an occupancy change.

Another reason this may happen is if a lender simply chooses to not originate any HARP loans for investment properties.  Bank of America recently changed their policy and is only participating on any HARP loans for investment properties.

Here are some details of what some of the larger lenders can do.  I’ve gathered this information from the lenders directly when talking to some of their loan officers, so if this information is different than what you’ve heard, please let me know

• Bank of America

• Bank of America only participates in the Same-Servicer versions of HARP.  They also recently changed their policy to not do any non-owner HARP loans, even if the loan was originated as an investment property.  You must apply for your investment property HARP loan with another HARP lender.

• Wells Fargo

• Wells Fargo participates in both versions of Fannie Mae HARP loans but only participates in the Same-Servicer Freddie Mac HARP loan.  This means if your loan is backed by Freddie Mac, is serviced by Wells Fargo and you changed occupancy, you cannot get a HARP loan from Wells Fargo.  Also, if you are applying for the Same-Servicer version of Freddie Mac HARP, Wells Fargo offers this product to independent mortgage brokers who work with Wells Fargo.  Its worth shopping this loan with Wells Fargo and a Wells Fargo approved mortgage brokers.

• Chase

• Chase is the only large bank that I know of that participates in both versions of HARP for Fannie Mae and Freddie Mac.  However, I have found that most Chase loan officers do not know the difference between the two programs.  They often turn down clients who ask for an investment property HARP loan backed by Freddie Mac due to a change of occupancy, not realizing that the Open-Access version is eligible.

• GMAC

• GMAC only participates in Same-Servicer Freddie Mac HARP product and the Fannie Mae HARP product that any Fannie Mae lender can do.  For the purpose of a rental property, this means GMAC cannot do a HARP loan on a Freddie Mac backed investment property where there was an occupancy change.  You will have to shop for an Open-Access lender.

One thing to note is that if you have changed occupancy, you would need to refinance under the Open-Access Freddie Mac refinance which is the same for every lender. This means that your current lender has no special ability to get your refinance through than any other Freddie Mac lender offering this program, so be sure to shop for your lender based on knowledge, service and price.

PITFALL #2- My lender says I’m limited to 105% LTV, but HARP says I can go to 125%.  Who’s right?

In this case, the lender often is right.  Even though HARP states you’re limited to 125% of the home’s value, all HARP loans not closed through the same-servicer product must be ran through a software program called an Automatic Underwriting System.  Freddie Mac’s program is called Loan Prospector or LP for short.  It doesn’t matter what the written guidelines say, if LP states your loan has too much “overall risk”, it will turn down the loan and the lender will not be able to close the loan.  In all the HARP loans I’ve closed, I’ve never seen LP accept an investment property loan over 105%.  I have seen Fannie Mae approve investment properties above 105%, but not Freddie Mac.

PITFALL #3- My lender says I don’t make enough money to qualify.

If you get this answer, this means the lender is attempting to close your loan under the Freddie Mac Open-Access refinance program.  This is because the Same-Servicer program does not calculate debt-to-income.

Please note that there are very specific guidelines on how to calculate debt-to-income on a rental property that most loan officers do not know how to do properly.  Loan officers who have experience working with investors or complex tax returns should be on your list of requirements when shopping for a lender.  If your loan officer doesn’t ask your for your lease agreement, mortgage statement and tax returns including Schedule E’s on the first call, they likely are not a good candidate to handle your refinance.  Calculated correctly, most rental properties are eligible for a refinance, even if the property receives a small rental loss per month.

PITFALL #4- My lender says I must have assets in my bank account.

This request, like #3, is likely due to a lender processing your loan as an Open-Access refinance.  This pitfall is 100% true, as Freddie Mac’s program LP, always asks for 6 months of payment reserves on rental property refinances.  Be prepared to show you have assets ready when you apply.

PITFALL #5- I’ve heard we don’t need an appraisal for HARP, but I’m being asked to order an appraisal.  Why?

Freddie Mac doesn’t always require a homeowner to order an appraisal when you do a Same-Servicer HARP loan, but if you changed occupancy and are applying for a Freddie Mac Open-Access, this program always requires an appraisal.  Be prepared to order an appraisal and expect the cost to be higher than a normal appraisal.  This is because appraisals for rental properties include a rent schedule which adds to the cost of your report.

PITFALL #6- I’m told I can only have 4 properties financed.  Is this true?

If you are refinancing a Freddie Mac investment loan on the Same-Servicer program, there’s no limit to properties financed but there is a limit to 4 on the Open-Access program.   If you have more than 4 properties with a loan on them, you can only refinance a Freddie Mac HARP loan if the loan was originated as a rental property originally and through your current lender on the Same-Servicer program.

If you changed occupancy and have more than 4 properties financed, you’re out of luck.

Sound familiar?  It should because the Making Home Affordable movement has two refinance programs and a modification program.  So what will make this one different?

We haven’t seen any details on this new “broad” refinance program but there’s a good chance that it will be modified versions of existing programs.  Some of the programs released were a success while others were a huge failure.  Let’s summarize the government’s previous attempts.

FHA Secure (2007-2008)

This program was implemented by the Bush administration.  It was designed to help homeowners who were late on their mortgage due to an adjustable rate mortgage refinance to a FHA fixed rate loan

Success or Failure?

-FAILURE-

One of the program requirements were that the homeowner must be late following a rate adjustment.  When I’ve talked to homeowners, they’ve expressed the importance of getting help before they’re in trouble, not after.  Responsible consumers see their credit as the biggest reason they search for help. Asking them to request help after they’re late is like asking someone to reach for help after their head is under quick sand.  Homeowners want help before their late, not after.  In addition, lenders were more reluctant to participate in a program that required a homeowner to be in default.

HARP- Home Affordable Refinance Program (2009 to current)

This program was part of the 2009 Economic Stimulus package signed by Obama.  The program is designed to help homeowners with conventional loans backed by Fannie Mae or Freddie Mac refinance to new terms with less equity than what is traditionally required for a conventional refinance.  This program has different versions including programs the existing servicer can do and programs that other Fannie Mae/Freddie Mac lenders can do.

Success or Failure?

-SUCCESS-

This program was originally launched with mild lender participation.  They added some features to boost participation, including higher loan-to-values and adjustments to improve rates. Hurdles along the way include 2nd mortgage companies blocking homeowners from refinancing their first mortgage (called a subordination), misinformation about the program (The Making Home Affordable website stated it was only for a primary residence home which is not true) and strict lender overlays.  Lenders began loosening their guidelines and approximately 810,000 homeowners have successfully refinanced under HARP.  Many homeowners are still having troubles refinancing if their loan has private mortgage insurance or if they have a 2nd mortgage where the creditor is unwilling to subordinate.  The program has been extended a second time until June of 2012.  Other than PMI insured loans, the biggest hurdle this program faces is loan-to-value.  Even though they’ve expanded the program to allow 125% financing, few lenders will lend above 105%.  With values continuing to decline, this program is quickly becoming an option that homeowners discover too late.

HAMP- Home Affordable Modification Program (2009-current)

This program was launched the same time as HARP.  The purpose of this program is to help homeowners with loans if the homeowner is facing hardship and does not qualify for a traditional or HARP refinance

Success or Failure?

-FAILURE-

This program has seen some success but not the success that was expected.  One of the largest problems facing this program is that the participating lenders did not have existing professionals in place to service the consumers. As institutions did their best to implement the program, newly hired staff had to stumble their way through a new program they were not familiar with.  Many homeowners have seen some success but there have been too many failures with this program.  One of the biggest problems with this program is the lenders misinformation given to customers.  Many lenders told their clients that they had to be in default to qualify.  Some lenders told their customers they could try a “trial payment” period while they determined eligibility.  Many of these homeowners didn’t understand that this process made their mortgage late.  Lenders also didn’t properly qualify the customers on which program best suited their situation, sending well qualified HARP customers to a HAMP specialist .  These customers unknowingly started a HAMP modification and later find out they not only were turned down, but the “trial payments” disqualified them for HARP.  Improper training and implementing a new type of program has been the largest factors associated with HAMP’s failure.

FHA Short Payoff Refinance (2010-Current)

This program is designed to help homeowners refinance to a FHA loan and reduce their principal balance.  Although the program is still in existence, talks of ending this program have already begun

Success or Failure?

-FAILURE-

Successful refinances on this program are few.  The underlying lenders did not have the infrastructure in place to deal with “negotiations” to take a reduced principal payoff during a refinance.  In addition, there was limited participation from FHA lenders.  The biggest problem with this program is that it removed a viable refinance program for homeowners that already existed. Prior to the implementation of the FHA short refinance, FHA allowed any homeowner to refinance their first mortgage up to 97.15-97.75% of their value with a second mortgage with no limit to value.  Homeowners who had subprime 80/20 mortgages (loans where they financed 100% of their purchase with two loans) could refinanced their underwater house by converting their first mortgage to a FHA fixed rate loan and keep the existing 2nd mortgage if it exceeded their value.  When FHA implemented the short refinance program, they discontinued allowing homeowners to refinance and keep their 2nd mortgage with no limitations.  A regular FHA loan was a great solution for homeowners with subprime or Alt-A 80/20 loans that was removed due this program, causing more harm than good.

THE PLAN

As a professional in the mortgage industry, I understand how difficult it is to make new programs with different investors involved.  We cannot make one, simple program to help everybody because every loan is backed by a different entity.  A quick, simple adjustment to all existing loan programs will help most homeowners.

Watching different programs come and go, I’ve found some consistencies in the successes and failures of these programs.

I found that programs that required lenders to create a whole new staff to support were slow in implementation due to training and funding for startup, where programs that relied on existing staff worked well.  Teaching an experienced loan underwriter a “modified” version of a conventional refinance is easy, as is training the loan officers.  Training a person to originate or underwrite a program that has never existed takes time, patience and more funding.

I also found that programs that were designed to help homeowners BEFORE they were in trouble succeeded.  This is one of the reasons HARP has seen a higher level of success than other programs.

In addition, programs designed to be profitable for banks to participate and minimize additional liability were implemented faster by institutions.  It’s not hard for a company to train staff to work on programs that help the company make money.

Lastly, programs that didn’t require any “exceptions” from the underlying lender also have been easier.  From my experience, the biggest problem with the FHA short refinance was the participation of the lenders being paid off, not the lenders funding the new loan.  This also has shown true with HARP when lenders requested subordinations from a second lien holder.  In a related topic, this holds true with PMI HARP loans where the PMI companies may not be willing to issue a new policy on the new loan being funded.  The more entities who need to say “yes”, the less likely the transaction will close.

Here are some ideas:

LOANS BACKED BY FANNIE MAE AND FREDDIE MAC

HARP has seen a substantial amount of success but there are still a few major hurdles to overcome.  As mentioned above, we need to deal with loans with PMI and loans loans over 105% of the home’s value.  Lenders are not willing to lend above 105% even though the program allows it because the lenders share the liability.  Another problem is less lenders are participating in the Freddie Mac HARP program for lenders who do not service the loan.  This has reduced lender participation and homeowners with Freddie Mac backed loans are losing their options to refinance.

Solution

The government should remove any additional liabilities related to funding loans up to 125% of the home value.  They should also increase the eligibility of a homeowner closing these loans without an appraisal.  Some loans are eligible for a HARP refinance without an appraisal but not all of them.  If the guidelines allowed more appraisal-waiver loans and less risk for loans over 105%, more lenders would participate.  To help reduce liability, keep these new, expanded guidelines to homeowners with higher credit and stronger compensating factors.  I’ve found that many homeowners will simply never default on their loan and are extremely responsible, but do not have any options. Allowing them to refinance to a lower rate will help more money enter our marketplace without adding any unneeded risk.  In addition, Freddie Mac should model their HARP program more similarly to Fannie Mae and allow more appraisal waivers and loosen restrictions to participating lenders.

ADDED 9/12/2011

It would also help if Freddie Mac removed their limit on properties financed.  Freddie Mac currently has a limit that keeps homeowners from refinancing if they have more than 4 properties with a loan.  Why would they stick to this guideline when the loan is already owned by them?  Fannie Mae figured this out and removed any limitations related to the number of financed properties when a borrower is applying for a HARP loan.  Freddie Mac should follow the same.

In a press release on Friday, The Federal Housing Finance Agency responded to the press release from President Obama.  The announcement mentioned a “reevaluation” of the existing HARP program.  You can read the announcement here:

http://www.fhfa.gov/webfiles/22607/HARPSTMT9911.pdf 

LOANS BACKED BY FHA

FHA has already had a good solution by allowing homeowners with FHA insured loans to refinance without an appraisal.  However, FHA has recently increased their mortgage insurance premiums making it harder for homeowners to refinance to a lower rate and save money.

Solution

I understand that FHA needs to increase their premiums since more homeowners have begun using FHA loans, but why charge existing FHA homeowners more?  These homeowners are already paying FHA premiums and by not allowing them to refinance, we remove the ability for a homeowner to save money.  If we can allow homeowners to refinance to a new FHA loan without increasing their mortgage insurance premiums, FHA will continue to receive the same premium while putting more money in the homeowners pockets.

LOANS BACKED BY VA

The VA already allows veterans with VA insured home loans to refinance with no appraisal (called a VA Interest Rate Reduction Refinance Loan or IRRRL) but there’s a new problem.  The VA has been too loose on their guidelines allowing veterans to wrap expensive loan costs into the loan without an appraisal, increasing the risk to the new lender.  This has resulted in VA lenders requiring an appraisal on a refinance program that doesn’t require one.  Very few lenders still participate in this program without an appraisal and many of the ones that do charge high fees.  Others only offer versions of VA loans like adjustable rate mortgages, limiting a veteran’s option to refinance.

Solution

The VA should increase the insurance on IRRRL loans so lenders are more comfortable lending.  They should also limit the new loan to be near or the same principal balance as the old loan so the lenders do not increase their risk.  Lastly, they should REQUIRE any lender who wishes to participate in VA insured home loans to offer IRRRL loans.  If a lender is not increasing the risk and the loans have more insurance to protect them, the VA has every right to request the lender to offer these loans without the request of an appraisal.  It’s ridiculous that our veterans who are underwater are told by the VA that they qualify for a refinance only to find a handful of options of lenders and programs to choose from.

LOANS BACKED BY THE USDA

These loans require the homeowner to be qualified for a 1% rate reduction, which is a little strict.

Solution

Many homeowners can reduce their rate by .5-.75% while paying almost no fees on other programs.  If the USDA implements the same policy as FHA, which requires the payment to drop 5% from the previous payment, this will help more homeowners in reducing their interest rate.

LOANS NOT BACKED BY ANY OF THE ABOVE AGENCIES

There are many home loans not backed by the agencies above.  Homeowners who seek payment relief and find their loan is not supported by these programs are left with few options.

Solution

This is a tougher problem to fix, but one of the first ways of solving this is by changing the FHA guidelines back to where homeowners can take a FHA loan with a second mortgage behind it without value limitations on the second mortgage.  If we change FHA guidelines to allow second mortgages to exceed the value of the home, we can then implement a government loan program that provides a second mortgage covering the underwater portion of the mortgage.  The loan should probably be limited in size depending on the area and only be offered to very well-qualified homeowners who clearly have an intention of paying their loans back.  A higher credit score requirement for the second mortgage and a balance limited to $50k-100k depending on the area would likely work.  The second mortgages can be controlled and funded by Local Public Housing Agencies (Also known as PHA’s).  These agencies are already in place and fund FHA approved 2nd mortgages for home purchases.  They have the staff and experience to regulate these loans.  Most states, cities or local municipalities has their own local authority that manages down payment assistance programs.  If the government gives them funding to staff the program and cover the cost of funding these programs, we can release a program to help homeowners underwater regardless of who owns their home loan.

It’ll be interesting to find out what Obama’s plan looks like.  Stay tuned for updated information.

Recently, I was interviewed by Bloomberg.com on the topic.  Here is an excerpt of the article:

Mortgage originators are less likely to approve a HARP refinancing if they’re not servicing the loan because of the complicated process involved and the perceived risks, according to Michelle Murphy, senior policy analyst for housing and regulatory policy at the Federal Housing Finance Agency.

Keane Ng, a loan officer with Cobalt Mortgage Inc. in Kirkland, Washington, has collected about 300 virtual signatures since starting an online petition last October to pressure banks to approve borrowers with mortgage insurance for HARP refinancing.

“Some of the banks are just cherry-picking the easy ones, and the HARP loans with insurance are not easy,” Ng said.

Here is a link to the original article:

http://www.bloomberg.com/news/2011-08-16/banks-block-obama-on-mortgage-stimulus-plan.html

The petition mentioned in the article can be found here:

http://www.ipetitions.com/petition/harploans

I hope this helps bring attention to this issue.  I would like to express my thanks to Bloomberg for bringing this topic to light.

When a homeowner doesn’t have equity to sell their home and they wish to move, they only have few options:

1. Sell and Buy -  To sell and buy a new home without equity requires the homeowner to come up with cash to sell their home in addition to a down payment on a new home.  Many homeowners would consider this option but simply don’t have the funds.
2. Rent and Buy- Lending guidelines require equity in the property you’re turning into a rental if we want to use the rental income to qualify.  The only way you can buy and move in a new home immediately without having equity is to qualify for both the mortgage payment you currently have and the new one you’re applying for.  This can be difficult for many people.  TIP: If you need to rent and buy a new home due to a job relocation outside of a reasonable commuting distance, FHA will use the rental income to qualify regardless of equity.  This only applies to job relocations or taking a new job away from their current home.
3. Rent, Rent and Buy- This is not a commonly discussed option.  The goal is to establish history as a landlord so the lender will allow rental income to qualify.  If you cannot sell and buy, are not buying for a job relocation and cannot qualify without rental income, this option is for you.  It takes time and dedication to get to qualified with this strategy.  The homeowner must rent their current home and move into a rental themselves.  If they are in need of a different home, this fulfills a short term need of moving by finding a rental meets their immediate goals.  Meanwhile, they now are establishing rental income history.  Once they’ve claimed 1-2 years of rental income on their tax returns, the lender will allow them to use the rental income to qualify for a new purchase regardless of the equity position of their rental.  Here are the steps:
   1. Find a new home to move into as a rental and simultaneously rent the home you previously lived in.
   2. Be sure to file your taxes properly and show your new address on your returns as your home address and claim the rental income on your previously-occupied home.  This is done on a tax form called a Schedule E.
   3. Once you’ve filed your returns showing the rental income, the lender will consider that income in qualifying you for a new purchase
   4. Depending on the lender and the guidelines, you’ll either need to file rental income for 1 or 2 years.  It could be as short as 1-year before you can buy a new home!

Try to be open-minded to consider every possible option.  For the past couple of years, almost every homeowner who’s underwater feels trapped.  Many think their only option is to stay or let the house go in a short sale or foreclosure.  That’s when the “Rent-Rent-Buy” option comes in.

Most people wouldn’t think of moving out of their home and converting it to a rental while renting a home themselves, but it’s a short commitment to allow them to buy a new home later.

The lending guidelines for how a lender calculates rental income on a Schedule E varies depending on the lender and the type of loan you’re applying for, but almost every mortgage product allows rental income to qualify when filed on the borrower’s tax return. Unlike traditional debt-to-income calculations, lenders are allowed to use 100% of the income to wipe out the borrower’s mortgage payment on the rental property before calculating the debt-to-income ratio.  A net loss is divided into monthly expenses, like a loan payment or a net income is divided into additional monthly income.  Here’s an example to help illustrate how this is done:

EXAMPLE:

Let’s suppose you have a $1400 mortgage payment (which includes your taxes and insurance) on the house you want to rent.  You do some research to find out your home will rent for $1250 a month.

Next, you determine all your expenses for the home not including the mortgage payment.  We’ll keep the taxes and insurance out of this equation because it’s already in your mortgage payment.  These expenses may include property management costs, marketing, utilities or repairs to the home.  Let’s suppose those total costs for one year are $3000, which would show on your Schedule E tax form.

Your lender will review your income as detailed below:

$1250 rent x 12 months = $15000 a year

$15,000 in rent less $3,000 in expenses and your total net income is $12,000 a year or $1000 a month.

Next, we subtract the mortgage payment from the monthly rental income.

$1,000 rental income – $1,400 mortgage payment = -$400 monthly loss.

When the final rental income calculation is done, we do one of two things.  If the figure is positive, we add the income to the buyers  monthly income.  If its a loss, like the example used above, we treat this like an expense.   In our example, the previously occupied home is a $400 expense which we treat the same as a $400 car payment.  It still affects the buyers ability to buy a new home but not nearly as much as a $1400 mortgage payment.  This is usually all we need to help a buyer qualify.

There are other ways that lenders may qualify rental income, but the calculation above represents the more conservative approach by most lenders.  Another thing homeowners should look into when considering this is refinancing their rental home.  Many people think they can’t refinance their home when it’s underwater and a rental property, but the Home Affordable Refinance Program does allow this.  You can read more about this HERE.

For homeowners who are underwater and want to move, the decision to “Rent, Rent and Buy” may be the solution they’ve been looking for.

You can find some great tips for new landlords on these two articles from www.Bankrate.com.

http://www.bankrate.com/finance/real-estate/5-tips-to-make-money-on-home-vacancies-1.aspx

http://www.bankrate.com/brm/news/investing/20030311b1.asp

For someone who’s personally tried to assist a client in qualifying for this, I tend to agree with this movement.  The concept of the program is good and it may be true that principal reduction is required to prevent some foreclosures, but we’ve learned from HARP that the key to a successful program is to design a program that is beneficial to both client and lender AND must also have an existing infrastructure for lenders to implement the program easily.

HAMP and other programs have had failures because prior to the recession, lenders did not staff professionals experienced in loan modifications.  The time it takes to train people is lost time for a slippery housing market.  HARP has received its 2nd extension and represented a whopping 10% of all the refinance activity in 2010.  Why has the program been more successful than its counterparts?  Easy, the program is nothing more than a loan with different guidelines.  Loan officers, processors and underwriters only had to learn a few guidelines to add this program to their menu of loan options.  Lenders already staffed loan officers and the operation staff to support the program.  Even with this program was easy to implement, we’ve still needed time for lender participation and customer awareness to become effective. 

The FHA short refinance program had the staff to support the program like HARP but there were two elements that made this program too difficult.  One, most FHA lenders didn’t employ the staff to negotiate a short-payoff with an existing lender.  Two, there weren’t enough lenders who were willing to take a short-payoff on a loan that was underwater.  The program had incentives in place for the lenders if they accepted a short-payoff but details of the incentives were too vague and lender participation on both sides of the transaction have been minimal.

If anything, the introduction of the FHA short refinance program hurt the housing market.  Prior to the release of this program, FHA allowed homeowners to refinance to a FHA loan up to 97.75% of their home value and no limit on a second mortgage.  This gave homeowners an option to refinance if only their second mortgage was underwater and they didn’t have a Fannie Mae or Freddie Mac eligible first mortgage (a requirement for HARP).  When FHA released the short refinance program, the option to refinance above the value of the home without a short refinance was removed.  All homeowners who didn’t have a HARP eligible first mortgage lost their only option unless their current lender was willing to take less than the balance due, which rarely took place.

If congress is successful in killing the short refinance program, I hope they convince FHA to change to their old guidelines where FHA allowed second mortgages above the home value.

Lender guidelines and participation have steadily grown since HARP’s inception.  Many homeowners don’t know of the program and need this extra time to refinance their home.  I believe this is an excellent decision and should have a positive impact to our housing market.    

According to an article from BusinessInsider.com, only 220,000 homeowners have refinanced under HARP where an expected 4-5 million were projected at the program’s inception. 

UPDATE 3/14/2011

The 220,000 closed HARP loans mentioned in the BusinessInsider.com article is inaccurate.  This figure was published by Alan Zibel on March 5th, 2010, over 1 year ago.  An article from MortgageNewsDaily.com has indicated that 621,083 HARP refinances were closed in 2010 alone.  It’s not the 4-5 million they hoped for but there’s no question that lender participation and consumer awareness have grown. 

Here’s a copy of the announcement: 

FHFA Extends Refinance Program By One Year   

Washington, DC– Federal Housing Finance Agency Acting Director Edward J. DeMarco has announced an extension of the Home Affordable Refinance Program (HARP), a refinancing program administered by Fannie Mae and Freddie Mac, to June 30, 2012.  The program was set to expire on June 30 of this year.  In addition, Fannie Mae and Freddie Mac will make the following adjustments to their programs:  Freddie Mac will exempt HARP loans from their recently announced price adjustments and Fannie Mae will conform their eligibility date to May 2009.    The program expands access to refinancing for qualified individuals and families whose homes have lost value.  HARP has grown over the past year.  In 2010, Fannie Mae and Freddie Mac purchased or guaranteed more than 6.8 million refinanced mortgages.  Of this total, 621,803 were HARP refinances with LTVs between 80 percent and 125 percent. This is up from 190,180 in 2009, when HARP began.  

Here’s a link to the announcement:   

http://www.fhfa.gov/webfiles/20399/HarpExtended0311.pdf   

I have two suggestions related to this topic for homeowners:    

• One, if I had an investment property, I would try to refinance it as soon as possible.  Certain pricing guidelines that benefit investment properties appear to be a “loophole” in the guidelines.  This helps investment properties price very well but appear to be designed for homeowners, not landlords.  If the FHFA had let those guidelines slide since HARP was expiring soon, they may very well change them now that the deadline has been extended.
• Two, if you have a loan with PMI, this is the chance to let your voice be heard and let the government know that they should loosen guidelines to allow PMI backed loans to be done by outside lenders.  Too many people have their loans serviced by lenders who will not do PMI HARP loans or have their loan serviced by a company who does not originate loans at all.  These homeowners are well qualified and deserve to have their mortgage refinanced.  Being left behind due to an unlucky transfer of servicing to a mortgage company who does not originate new loans is not an acceptable reason for why these people cannot refinance their loan.

As it stands now, there are only a few confirmed sources that you can do a PMI HARP loan.  FYI, this list is VERY limited.  I will keep this updated as time goes along:

• Wells Fargo- Wells Fargo will do loans serviced by Wells Fargo and have PMI.  You must contact a Wells Fargo loan officer.  (if you want a referral, please contact me on my “Contact” page”
• Flagstar Bank- Flagstar Bank will do HARP loans through with PMI and even allow mortgage brokers to do these loans when brokered to Flagstar.  This is the ideal situation and what every lender should do.  This means you can contact Flagstar directly or any lender who works with Flagstar
• GMAC- GMAC now allows PMI loans to be refinance under HARP if you apply with GMAC directly.  What I don’t like about their method is that they have closed many of their retail locations.  Clients who have called their other retail division, Ditech, haven’t always gotten the service they need on these loans.  Even though I prefer lenders allow others to do loans for them, like Flagstar, I still appreciate that GMAC is trying to help.  However, their loan origination departments are too small to really touch base with all their clients.  It would be nice if they allowed correspondent lenders or brokers do these for them.
• Chase- I have confirmed that Chase will do these.  (also contact me if you want their contact info)
• Bank of America (UPDATED 1/24/2012)-  Bank of America is now allowing PMI loans to be refinanced under HARP if the loan is serviced by them

That’s it.  If anyone has heard of any other lenders who do these, please contact me so I can add it.  I will start a prospect list on this post and keep it separate from the list above.  I do this because I’ve heard too many stories of people who say they can do this but cannot.

While talking to a client who contacted me, we talked about starting a petition to help homeowners refinance HARP loans.  I started one.  If you have a loan you can’t refinance because it has PMI or you don’t believe in this restriction, please sign the petition.  It can be found here:

http://www.ipetitions.com/petition/harploans

UPDATED 1/24/2012

PMI companies are starting to allow their clients to convert their Lender Paid Mortgage Insurance to Monthly Mortgage insurance to help homeowners refinance under HARP.  If you have Lender Paid Mortgage Insurance and need to refinance, check who your PMI company is and see if they will offer this.  Also, I’ve found a small group of lenders who will offer PMI HARP loans not serviced by them.  Email me if you would like a referral.

Update March 11, 2011:

HARP has been extended until June of 2012.  Please take advantage of this extension and let your government leaders know we need help with customers with PMI backed loans.

http://www.keaneloans.com/2011/03/11/harp-extended-until-june-30th-2012/

If you want to read my extensive guide on HARP, you can find it here:

http://www.keaneloans.com/2009/12/18/homeowners-guide-to-harp

The new FHA program includes new FHA guidelines that no longer allow an unlimited Combined-Loan-To-Value on FHA loans.  This is a HUGE problem.  Let me explain.

In the past, FHA didn’t cap how much a homeowner owed on their house if the homeowner wanted to refinance the first mortgage as long as the new loan was within the 97.15%-97.75% of the home value.  For instance, let’s assume a home buyer bought a $200k home with 20% down and ended with a $160k mortgage.  The house appreciated to a value of $220k and the homeowner took a home equity loan of $50k for home improvements, making their new combined loan amounts $210k.  Then the market declined and the new value is $170k, making the homeowner underwater on their home loans by $40k.

FHA would still allow this homeowner to refinance the first mortgage even though the second mortgage brought the home value to over 100% since paying off the $160k still had was within the 97.75% FHA limit.

$170k appraised value x 97.75% FHA LTV limit= $166,175…enough to pay off the $160k first mortgage owed.

The homeowner would still have their equity loan but this gives them an option to refinance their first mortgage, which may have a high rate or may be an adjustable rate mortgage set to adjust soon.  The new FHA guidelines will not allow the value of the two loans exceed 100% UNLESS the 2nd mortgage company is willing to write down the balance.

Short payoff refinances  sound good, but lenders often don’t want to take less than what’s owed.  The old FHA guidelines actually helps more homeowners because more homeowners have 2nd mortgages where a short payoffs wouldn’t be considered.  In fact, current FHA guidelines DO NOT PROHIBIT SHORT PAYOFFS so the new guidelines are only stricter than the old guides!  How is this supposed to HELP homeowners?  The guidelines are tigher and it’s now a part of the Making Home Affordable program?  I’m still scratching my head on this one.

To stay on track, there is a VERY important message I need to get sent to every homeowner in America with a second mortgage.  APPLY FOR A FHA LOAN AND GET A CASE NUMBER ORDERED NOW!  Why?  FHA will allow you to close under old or new guidelines if your case # was ordered before the deadline for the guideline changes.  Right now, that date is September 7th, 2010, less than one week away!  Even if you don’t qualify for a loan right now, credit is too low, equity is less than 97.75% right now, STILL GET YOUR CASE #.  By ordering it now, you can always revisit this option in case your credit is improved or equity position has improved down the road.  FHA doesn’t cancel case #’s and consumers who have a case # ordered are grandfathered into the old guidelines.  This allows above 100% combined loan-to-value and still allows you to explore the short payoff options that are available. 

If you talk to the right lender, you should be able to get this done in one day and for free.  Again, all homeowners who have 2nd mortgages and may consider refinancing at some point, please get a FHA case # ordered in the next couple of days.  Details can be read on this announcement letter from FHA:

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/10-23ml.pdf

Landlords also believe that many of government programs, such as HARP (Home Affordable Refinance Program) offered exclusively for homeowners are not for investment properties.  Well, I have some news for you landlords, not only can you do a HARP refinance on a rental property, they are PERFECT for rental properties.  Let me explain.

When HARP was first released, it had similar risk-based pricing that regular conventional loans had.  Many homeowners were discouraged to find out they qualified for HARP but the new higher credit requirements for conventional loans made these loans too expensive.  Homeowners would hear about 4.5% 30 year interest rates but were often offered 6%+ rates.

The government then implemented an adjustment cap to help homeowners who had these lower credit requirements.  This cap was equivalent to about .5% to the homeowners interest rate, meaning if 30 year fixed HARP loans were at 4.5%, everybody who qualified for HARP would only pay 5% or less depending on their qualifications.  It was a noble cause to make sure all homeowners could get a decent rate.

However, this is what makes HARP perfect for landlords.  HARP doesn’t have special guidelines for rental properties, meaning lenders who offer 105% of a homeowners value on a primary residence usually offer the same limit on investment properties!  Also, the .5% cap for HARP loans applies to all HARP loans.  This means landlords can refinance their investment properties at .5% above the best HARP rates regardless of credit, property type or equity!  This is, of course, as long as they are still within HARP guidelines.  I believe it’s probably an oversight, as I doubt the purpose of this cap was to offer amazing rates to property investors.

Today, I helped a homeowner who had two rental properties lock interest rates for their house and their two rentals. The rates we locked were 4.5% (owner-occupied 4.6% APR), 4.875% (Fannie Mae backed rental 4.995% APR) and 4.875% (Freddie Mac backed rental 5.007% APR).  None of the properties had more than 10% equity and one of the rentals was near 100% of the value!  What was the client’s credentials?  Well, if the credentials weren’t perfect, he may have had to pay a higher rate on his primary residence but it would’ve bared no change to his rental property rates.  Crazy, isn’t it?

If you have a rental property you’re trying to refinance, check to see if it’s owned by Fannie Mae or Freddie Mac.  If it is an d you’re paying more than 5.5%, then call your loan officer and lower that rate.  How often does the government help you improve your cash flow?

TIP FOR FREDDIE MAC INVESTMENT LOANS

Some of you have read my posts on HARP and realize that HARP is a product you can apply for with your current lender but can also apply with outside lenders.

Freddie Mac has a version of HARP for your current lender that is different than the version for outside Freddie Mac lenders.  If you have converted a primary residence into a rental, your current lender CANNOT do a HARP loan for you but you CAN get this done with an outside Freddie Mac lender.  I’ve confirmed this with several lenders.  A few veteran loan officers at banks may have access to the outside-Freddie Mac version of HARP and still help but not often.  If you have a primary residence converted to a rental property and have a Freddie Mac loan, look for a Freddie Mac lender who can help you.

UPDATE March 11, 2012:

The government extended the HARP deadline from June 30th, 2011 until June 30th, 2012.  I hope they modify the program to help more homeowners but if they do look into modifying the program, there’s a chance they may change the price cap that helps rental property loans price so well on HARP.  I would recommend refinancing your HARP eligible rentals as soon as possible.

http://www.keaneloans.com/2011/03/11/harp-extended-until-june-30th-2012/

UPDATE 11/21/2012

HARP 2.0 will improve the price adjustment for Fannie Mae investment properties since the fee cap will be lowered.  Freddie Mac is keeping their fee cap the same for investment properties, only improving the cost for non-investment HARP loans.

For homeowners looking for more information on getting approved for a Freddie Mac HARP investment loan, please read this post:

http://www.keaneloans.com/2011/10/14/how-to-qualify-for-a-freddie-mac-harp-refinance-on-a-rental-property/