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HARP 2.0 Setting Up As a Disaster

Here’s another instance of Administration housing policy benefiting banks over people. We’ve been anticipating the rollout of HARP, the Administration’s newly-tweaked refinancing program, which will allow underwater borrowers who are current on their loans to refinance into a lower interest rate. The program was announced last year, but the updating of Fannie Mae and Freddie Mac’s Desktop Underwriter program was supposed to make the changes turnkey, and boost mass refinancing, because it would allow any lender to refinance another lender’s loan. So where are we at? Kathleen Pender reports that, while this was supposed to free up newly eligible borrowers to shop around for the best refi, this isn’t happening:

Banks are free to add their own requirements, and some have. Wells Fargo spokesman Jim Hines says, “We also employ minimum credit standards to ensure customers have capacity to repay the mortgage.” Some banks, including Chase and Bank of America, are not refinancing loans under Harp 2 that they do not already service.

What this all means is that some otherwise-qualified borrowers might have difficulty refinancing at a decent price. Although Fannie and Freddie have lowered the fees they usually charge on refis, the banks can charge whatever the market will bear.

This defeats the entire purpose of HARP. The idea is that borrowers would no longer be shackled to their servicer and able to seek a refi from anyone, finally giving them some leverage over the process. But if Chase and BofA refuse to refinance loans they don’t already service, that reduces flexibility significantly. And Wells Fargo already made this announcement.

What’s more, while there were supposed to be no limits on loan-to-value ratio in the new HARP, many lenders are imposing such limits.

Originators – who often continue to service loans they sell to Fannie or Freddie – don’t want all the headaches associated with servicing defaulted loans. That’s why some lenders are still imposing loan-to-value limits and other requirements.

RPM, for example, will not go above 125 percent loan-to-value on Harp 2 loans. “Once they get above 125 percent, the threat of strategic default goes up dramatically,” Lepre says.

Cherene says most of the lenders he works with also won’t go above 120 or 125 percent.

The upshot of all of this is that the new HARP won’t do a damn thing. In fact, borrowers will remain trapped. If the major servicers won’t refi loans they don’t service, unless some enterprising servicer swoops in and provides some competition, underwater borrowers will be at the mercy of their existing servicer for a refi. And that servicer can jack up the interest rate above the market level. And, this won’t extend above 120-125% LTV, a small increase from the current standard of around 105%.

So the super-charged HARP isn’t super-charged. The banks have all the discretion, once again, and they won’t take any risks. What’s more, they’ve found another way to use an Administration housing program to profit off their customers more than they should.

The whole point of HARP was to cut monthly payments for borrowers, giving them more of an ability to pay and, really, giving them stimulus dollars they can cycle into the economy. That will be limited, thanks to yet another crappy design put to use for the banks instead of the people.

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David Dayen

David Dayen