For years, FHA has allowed existing homeowners with FHA insured loans to refinance to new rates without an appraisal. Similar to HARP, FHA streamline refinances have traditionally allowed homeowners to take advantage of lower rates with relaxed guidelines on home value. Without any new stimulus bills, speeches from the president, or elaborate media buzz, FHA streamline refinances have been helping millions of homeowners qualify for lower rates.

Unfortunately, some recent changes to the FHA guidelines have eliminated many homeowners from qualifying for a lower rate refinance. With politicians spending countless hours improving upon HARP, how could this key group of homeowners have been forgotten?

In 2006, FHA represented less than 4% of all home purchase loans. By 2010, FHA was being used for almost 20% of all purchases. This sudden spike in FHA loan origination instigated a series of changes to the program that included higher costs in the form of expensive mortgage insurance. This was a necessary change to help the funding of FHA loans.

The higher costs for newly originated loans are probably justified, but existing FHA borrowers refinancing to take advantage of new low rates are in for an unfortunate surprise. Here’s an example: if a homeowner had a $200,000 5% FHA 30-year fixed originated in 2009, they would have a payment of $1,165.31 with FHA mortgage insurance (a mortgage insurance rate of .55% annually at the time). If the same homeowner applied for an FHA streamline refinance in 2011 at 4%, their payment would only reduce to $1,146.50 (the current FHA mortgage insurance rate is 1.15%). Is it reasonable to spend thousands of dollars in closing costs to save less than $20 per month? Probably not.

One other interesting thing is that FHA is losing revenue by operating this way. FHA charges an upfront fee called an Upfront Mortgage Insurance Premium. On a streamline refinance the fee is reduced, but represents real income for FHA. Ultimately, millions of homeowners are not participating in the program, and are unnecessarily paying higher rates.

THE SOLUTION

In my mind the solution is simple. While it may be necessary for FHA to increase its costs, there is no real reason to charge more to existing homeowners with FHA loans. If FHA allows existing homeowners to keep their current monthly mortgage insurance costs, a homeowner can lower their rate and payment similarly to HARP. FHA can charge the homeowner a new upfront cost which most homeowners are happy to pay to benefit from a lower rate.

A colleague I spoke with indicated that FHA streamline refinances have a higher rate of default, which may be the reason FHA is imposing the higher costs. I can believe that this is true, and it is probably related to the loose FHA streamline guidelines. For example, they is no appraisal requirement, nor is there a debt-to-income ratio standard. (Note: Debt-to-income ratio is a calculation lenders use to identify whether a homeowner can afford a given monthly payment).

It is not clear to me why the FHA cannot change the guidelines to require a debt-to-income ratio calculation. As it stands now, a lender will allow homeowners to refinance on a FHA streamline loan without checking to see if they can afford the payment. For example, a homeowner could have a pay cut immediately after becoming over-extended with credit card debt. Under current FHA guidelines, this homeowner would qualify for an FHA streamline refinance. We can easily imagine how helpful a reduced payment could be for the homeowner, but clearly this is not the intent of the program. I would argue that the program could have a much larger impact were it to focus on the earlier group I spoke about.

One out of every six homes purchased since 2009 was closed using an FHA loan. Since 2009, values have declined further and many of the homeowners who purchased are now underwater without any refinance options to lower their payment. Spending time to improve HARP is a great thing, but there are millions of folks with FHA loans in the predicament described above. I talk with approximately one per day. If the government is serious about helping homeowners refinance their underwater mortgages, it’s time they undo the price hikes on FHA streamline refinances.

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

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.

The largest impact will be directly to mortgage loans that are being contracted to close during the shutdown. Many new applications will sit stagnant while we wait for congress to come to a resolution. How badly this will affect the housing market will depend heavily on how long the shutdown is. For all the work the government has done to avoid a double-dip housing recession with bailouts and government programs (such as the Making Home Affordable programs) their inability to resolve budget disputes may be the direct cause of another drop in house values. 

WHAT FEDERAL AGENCIES WILL BE AFFECTED AND HOW WILL IT IMPACT THE MARKET?

FHA

Specifically, FHA is getting a lot of attention and rightfully so. FHA has been a savior to the mortgage industry since 2008 at the beginning of the recession providing affordable loans with reasonable credit guidelines. From 2005 through 2007, FHA never represented more than 4.25% of all the home loans originated. In 2010, FHA represented over 19% of all home loans and a whopping 30% of new home sales. These statistics have been published directly by the Department of Urban and Housing Development. FHA will not insure home loans during the shutdown. Lenders may choose in their own discretion to fund the loan and request insurance after the shutdown is over.

VA

As of right now, most reports show that the Department of Veterans Affairs will not be impacted. This is good news for veterans who are currently looking to buy a home.

USDA

The USDA (US Department of Agriculture) insures affordable home loans for rural areas. The USDA will not insure new home loans and I’ve received reports that their automated underwriting engine (Guaranteed Underwriting System) will not operate. This not only halts the funding of some USDA loans, but will prevent lenders from pre-approving buyers for this program. Although USDA represents a much smaller percentage of loans than FHA, this program is hit the hardest of the three. Lenders can still manually underwrite the files but most will require the assurance of USDA’s program to approve a client. This is unfortunate after the government spent months working on a budget to fund the USDA after they ran out of loan funds for a portion of 2010. It does sound like USDA lenders will be able to close loans with a conditional commitment up to 90 days of the commitment, but new applications will not be processed and new prospective buyers won’t be able to get pre-approved. Like FHA, lenders may choose to close the loan and wait for the shutdown to end before sending the loan to the USDA at their own discretion.

IRS

Now, let’s talk about the big entity nobody is talking about when talking mortgages, the IRS (Internal Revenue Services).

Many of you are wondering, “How does the IRS have an effect on the mortgage industry?” There’s many ways the IRS can affect home loans since we use tax documents to verify income, but not in the most obvious way.

Mortgage lenders rely heavily on tax documents to calculate and verify a homebuyer’s income. Most homeowners will have their tax documents on hand, but the mortgage industry needs more than a copy of the documents.

Prior to the mortgage meltdown, mortgage lenders trusted their consumers that the tax documents they received were accurate and complete. Lender guidelines have since changed. To avoid fraud and also catch amended tax returns, mortgage guidelines require verification from the IRS that the tax documents the lender has reviewed were accurate and complete. These verifications are done by tax transcripts ordered by the lender to the IRS. You can read more about why transcripts are required here.

Lenders are now requiring transcripts on virtually all loans being processed. Specifically, Fannie Mae and Freddie Mac require transcripts for every loan file. I’ve found some reports that state Fannie Mae and Freddie Mac will remain operational, indicating that consumers can obtain a Fannie Mae or Freddie Mac conventional home loans with no issues. That is only partially true. If the government were to shut down, any consumer who’s applying for a Fannie Mae or Freddie Mac loan will not be able to close on a loan unless the lender had already verified the tax transcripts with the IRS. Any Fannie Mae or Freddie Mac loan not including transcripts cannot be closed.

This is an issue that appears to be overlooked and will have a larger impact than many have considered. Yes, FHA will have a huge impact, but adding Fannie and Freddie to the mix is a whole different story. According to Fannie Mae, they are the largest issuer of mortgage related securities in the second market representing 44% of the marketplace in 2010.

Fannie Mae and Freddie Mac represent more than 60% of the home loans originated today, plus FHA represents over 15%. Not including USDA loans, those three entities already represent more than 75% of all home loan issued today. If gone unnoticed, this government shutdown will have a much larger impact than many are expecting.

Do I think this will destroy the housing market? Honestly, I don’t. At one point, the government will realize the size of this impact and implement some type of action plan. I just hope this is noticed before there’s a government shutdown, not after.

TIPS FOR HOMEOWNERS:

Here are a list of items I would recommend be completed based on the type of loan you’re looking to close.

ALL LOANS

· Order your tax transcripts immediately.

· I haven’t been able to find exact details, but I would order any outstanding flood certifications if you haven’t determined if the property is in a flood zone.

FHA

· FHA Connection will still be up to order case numbers but CAIVRS (a program that does a background check on all parties involved in the transaction)will be down, so have your lender order your CAIVRS Reports right away.

USDA

· USDA will only insure loan commitments already issued (90 day expiration). If you still have time, try to get your commitment approved prior to the shutdown.

· GUS will not be operational, so all buyers looking to get pre-approved on USDA should process their pre-approval right away and new loans should be ran through GUS if they haven’t been done yet.

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

One of the changes we’ve seen in the mortgage  industry is lenders requiring the actual transcripts in a loan file before they’ll close.  This means that the tax return filings must be filed and ample time must be given for the IRS to update their database with the filed returns before a consumer can close on the loan.  This process can take several months AFTER the IRS actually receives the tax returns! This has caused issues with consumers buying or refinancing who do not have filed tax returns due to extensions or the tax returns are filed but they’re simply waiting for the IRS to show them in their system.  What happens if they can’t get the transcript?  Simply put, most mortgage lenders will not let the consumer close on a loan.   This is not an issue for many consumers but for the few who have late filings or amended returns, this could be disastrous.

I’VE SENT MY MORTGAGE COMPANY MY TAX RETURNS…WHY DO THEY NEED MY TRANSCRIPTS?

For those who haven’t seen a transcript, it’s basically a summary of everything you would see on a 1040 tax return filing.  1040 tax returns are typically requested for a mortgage application and along with all schedules/worksheets, gives all detail as to how the tax return was filed.  So why would a mortgage company need a transcript?  It’s a good question that I hear often from my clients.  Here are several reasons why lenders request IRS transcripts:

• WAS THERE SOMETHING WE WERE MISSING?- Transcripts will show figures from all applicable schedules that may not show on the 1040 tax returns.  For instance, a Schedule C shows a breakdown of business income and expenses.  Also, a Schedule E shows a breakdown of all investment real estate income and expenses.  Many consumers will only send the 1040 returns and not include schedules.  These figures affect a loan application and the way a lender sees a consumers portfolio.
• DID YOU AMEND YOUR TAX RETURNS?- A consumer may be giving their mortgage company a tax return, but what if their accountant did a small amendment that the consumer forgot to disclose?  The transcripts will show the correct figures as received by the IRS including any updates.
• WE HAVE TO USE THE “F” WORD, BUT HOW DO WE KNOW THE TAX RETURNS AND TAX FORMS AREN’T FRAUDULENT?- Maybe not the “F” word you were thinking of, but in our industry, this word is a million times worse.  One of the reasons lenders now request these transcripts is because when they did order transcripts on OLDER loans that defaulted, they found many of them had fraudulent documents including fraudulent tax forms and returns.
• ARE YOU BEHIND ON YOUR TAXES?-  You can buy a home with taxes due, but you can’t if the IRS files a lien.  The consumer transcripts will show if the consumer had a large tax bill due.  If there was, the lender is likely to ask for proof that the taxes were paid.

This is one of the reasons it’s so important that both the client and lender follow due diligence and collect ALL documentation prior to committing to a closing date on a loan.  Especially on a home purchase where there’s a seller involved.  Lenders should be requesting these transcripts at the beginning of the loan process, not the end.  I’ve heard too many horror stories of “Approved” consumers who are turned down at closing because the tax transcripts are not available.  It’s fairly new, so more mistakes will be made now than later.

I NEED A MORTGAGE AND MY TRANSCRIPTS ARE NOT RECEIVED BY THE IRS…WHAT CAN I DO?

Every lender policy regarding tax transcripts will vary but for the most part, most lenders want these to close. on a loan  If you need a mortgage now and haven’t filed your returns, be sure to disclose this to your lender and prepare your returns for filing as soon as possible.  When they’re completed and ready to be filed, you can get your returns expedited to the IRS through their local Taxpayer Advocate Service (TAS) office.    For those that don’t know who TAS is, here is an excerpt from their website:

The Taxpayer Advocate Service is Your Voice at the IRS!

Taxpayer Advocate Service (TAS) Mission:  As an independent organization within the IRS, we help taxpayers resolve problems with the IRS and recommend changes that will prevent the problems. Here are seven things every taxpayer should know about TAS: 1. TAS is your voice at the IRS. 2. Our service is free, confidential, and tailored to meet your needs. 3. You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn’t working as it should. 4.  TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals. 5.  TAS employees know the IRS and how to navigate it. We will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 6.  TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico.  You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service — Your Voice at the IRS, and on our website atContact Your Advocate.  You can also call our toll-free case intake line at 1-877-777-4778. 7.  You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www.taxtoolkit.irs.gov

From my experience, a local TAS office can rush the filing, provide receipt of the filed tax returns, provide accurate dates as to when the transcripts will be available and sometimes even write letters in behalf of the consumer stating the returns were filed and received by the IRS.  This can be very helpful if you need to close on your home loan quickly.

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