HARP 3.0 New Plan to Provide Relief to Underwater Homeowners.
A settlement between big banks and the government is set to spell relief for one million homeowners across the US who have been struggling to pay down the principal on their mortgages, but Will HARP 3.0 make it?
Valued at $26 billion, the settlement will help those who owe more than their home is worth by refinancing their loans at lower interest rates, or by reducing the debt from their mortgages. Hundreds of thousands more who already had their homes foreclosed on will also receive a sum to account for their hardships.
The settlement program is currently limited to those homeowners whose mortgages are owned by Bank of America, JPMorgan Chase, Citigroup, Wells Fargo or Ally. However, nine other major mortgage servicers are also in talks with the government, which could expand the settlement to cover more homeowners who would otherwise benefit from loan modifications.
Further, HUD Secretary Shaun Donovan remarked that, in his view, the agreement with the banks would be a catalyst for even more relief programs to take effect. He added that borrowers whose loans are owned by Fannie Mae and Freddie Mac could soon be eligible to participate in a similar principal reduction program.
The Obama administration has hailed the settlement as a major step in holding big banks accountable for the actions that precipitated the housing market crisis, which came to a head in 2008.
In addition to mortgage relief and modification, the agreement also requires banks to follow stricter regulations when dealing with homeowners with underwater loans. Prosecutors can still pursue allegations of fraud stemming from loan origination, as well as the practice of “robo-signing” documents without the borrower’s full knowledge and consent.
The banks that are taking part in the settlement have a three-year window in which to dispense the amounts to homeowners. $1.5 billion will also go to some 750,000 borrowers who experienced foreclosure between 2008 and 2011.
The settlement comes from the efforts of federal government agencies working in tandem with state attorneys general. In his official remarks, President Obama called it “the largest joint federal-state settlement in our nation’s history” and assured Americans that the big banks would be doing their part to redress the actions that led to the worst recession in generations.
“These banks will put billions of dollars towards relief for families across the nation,” he said. “They’ll provide refinancing for borrowers that are stuck in high interest rate mortgages. They’ll reduce loans for families who owe more on their homes than they’re worth. And they will deliver some measure of justice for families that have already been victims of abusive practices.”
Relief for homeowners, however, doesn’t end with the settlement. A plan that the President proposed in his State of the Union address would give millions more of responsible Americans the same opportunity to refinance their mortgages.
Under the proposal, more borrowers whose mortgages are current could tap into today’s low interest rates, resulting in the average family saving $3,000 per year in payments.
The Federal Housing Authority (FHA) would operate this program, which would streamline the refinance process for all standard loans owned or guaranteed by non-government-sponsored enterprises (i.e. non-GSEs).
That doesn’t mean that borrowers with GSE loans — those that are owned or guaranteed by Fannie Mae and Freddie Mac — are left out of the picture. They too would have expanded access to streamlined refinancing, so that homeowners with significant equity in their homes could also benefit.
Under the direction of the Federal Housing Finance Agency (FHFA), this streamlined loan underwriting process would increase competition among mortgage servicers and serve to strengthen housing markets.
Even when a borrower wishes to refinance a GSE loan under HARP, he or she usually needs a manual home appraisal to determine his or her eligibility. This is the case especially in neighborhoods with small numbers of recent home sales.
To facilitate this process, the President’s plan would do away with appraisal costs by directing Fannie and Freddie to use alternatives to determine home value, such as mark-to-market accounting.
Additionally, more lenders would be encouraged to participate in HARP, thus giving borrowers a chance at a better deal, by having the same streamlined underwriting in place for new servicers as it already exists for current servicers.
Whether they elect to go through HARP or the new FHA refinance program, borrowers with underwater homes would essentially have two options. The first would be to take advantage of their savings through lower mortgage payments. The second would be to use those same savings toward building home equity — potentially eliminating the gap between loan and home value within five years.
Rebuilding Equity Program
Take Joanna’s case as an example. Joanna’s 30-year mortgage, which originated in 2006, is $214,000 at an interest rate of 6.5%. Today, her outstanding balance on the mortgage is $200,000, but her home’s value has fallen to $160,000. That means her loan-to-value ratio (LTV) is 125. Although Joanna has continued to make loan payments responsibly, at $1,350 per month, a refinance is not currently an available option to her.
If Joanna were to refinance the mortgage at a rate of 4.25% while keeping the 30-year life of the mortgage, her monthly payment would be reduced to $980 per month — a savings of $370 a month, or over $4,000 annually. However, her home would still be “underwater” five years later, with $182,000 as her outstanding balance.
On the other hand, by choosing the rebuild equity option, Joanna could refinance at 3.75% for 20 years and use her savings to pay down the principal balance. In this scenario, she would have a balance of $152,000 in five years — below her current home value. She would also have her closing costs covered by the FHA or by Fannie Mae and Freddie Mac.
Other Homeowner Benefits
Other highlights of the plan as it was first proposed by the President’s administration include:
A homeowner Bill of Rights to establish a fair rulebook for borrowers and lenders to follow, simplifying mortgage forms, abolishing hidden fees and conflicts of interest, and protecting homeowners from unnecessary foreclosure repurposing foreclosed homes that are driving down community home values into rental properties extending the forbearance period to a full 12 months for borrowers with FHA and HAMP loans while they look for employment increasing the scope of the HAMP program and extending the deadline through the end of 2013, while increasing the incentives to servicers to encourage them to provide modifications to borrowers with underwater loans.
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