The Federal Housing Finance Agency (FHFA), with the Federal National Mortgage Association (“Fannie Mae”) and the (Federal Home Loan Mortgage Corporation) (“Freddie Mac”), today announced a number of changes to the Home Affordable Refinance Program (HARP) designed to increase the number of borrowers eligible for refinancing at-risk home mortgages.
One of the big deals of this new initiative is the removal of the loan-to-value ratio (LTV) cap on eligible fixed-rate mortgages. Now, mortgages that qualify for refinancing under the HARP have loan-to-value ratios of 80% to, well, as high as you've gotten yourself into.
It surprised me a little that 125% LTV wasn't enough, but after doing some math, I can see how LTV of 200% or more are not out of the question. In Miami, for example, inflation-adjusted home prices dropped 50% from 2007 to the end of last year. If someone took out a fixed-rate mortgage for most of the purchase price, then the loan-to-value would be in the neighborhood of 175% today if the borrower made regular payments against the mortgage.
Unlike the first- and long-time homeowner's tax credit, this initiative is almost completely for homeowners in over their heads. The minimum LTV ratio is 80%. That's not underwater but it's still fairly high leverage. The expanded HARP blanket is also targeted at people who are still making their payments; to qualify, there must have been no late payments in the past six months, and no more than one during the past year.
Is this HARP initiative throwing good money after bad?
This all makes for good press but guaranteeing loans this far underwater at attractive fixed rates isn't the kind of move the finance industry would make on its own. Under normal circumstances, lenders like (a) to be paid back, and like (b) to get interest that's commensurate with the risk they're taking with lending the money. Take away the risk of being paid back, and strange things happen, like really low interest rates for highly-undercollateralized loans.
That's the lender's side. But what about the borrower's side? Is it throwing good money after bad to take “The Enterprises” up on this offer? If the refinance actually does make things more affordable, yes. Pay the sucker down faster now that the payment's lower, or build up an emergency fund. Take advantage of it. The subsidy is there. It won't be there forever.
The economy would recover faster if the institutions and people exhibiting indiscretion were allowed to fail good and hard, but that's not the way we're doing it. Look into the new HARP initiative if you think you could benefit.
(And even if you're not underwater, if you haven't refinanced for a while, you might be pleasantly surprised with the current mortgage rates!)
(Thanks to Sustainable Personal Finance for including this article in the Carnival of Personal Finance.)