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Mortgage insurance puts roadblock on road to refinancing

By   |  Posted in Refinancing

Refinancing under the federal government's Home Affordable Refinance Program (HARP) is likely to be much more difficult if you have mortgage insurance (MI). HARP was designed to allow a wide swath of homeowners with little to negative home equity the opportunity to refinance at low mortgage rates. In reality, many obstacles--from packaging those loans into riskier mortgage-backed securities (MBS), to lenders' reluctance to refi loans in good standing, to lender-paid mortgage insurance (LPMI)--have stood in the way of successful refis..

Under HARP, homeowners are technically allowed to refinance up to 125 percent of their home's value. Eligibility guidelines simply state that your loan must be owned or guaranteed by Fannie Mae or Freddie Mac and be in good standing. Homeowners must be able to qualify for the new loan under Fannie and Freddie's current guidelines.

In theory, MI wasn't supposed to complicate things. The rules are this: If you currently have MI and your loan-to-value (LTV) increases under your HARP refinance, you are not required to get a higher level of coverage for the new loan. If you currently do not have MI, but your LTV in the refinanced mortgage exceeds 80 percent, you don't need to get mortgage insurance.

But it's not nearly as simple as that.

The reality

The unfortunate reality is that underwater homeowners with MI cannot refinance as freely as those without MI.

What's the sticking point? Though HARP officially allows refinancing at LTVs of up to 125 percent, the mortgage market doesn't care what the program guidelines say. Any loans with LTVs higher than 105 percent have to be packaged for investors into different MBS that are considered higher-risk--meaning those loans are worth less to the lender.

Many mortgage lenders effectively refuse to let you refinance with them for anything higher than 105 percent. If you have MI coverage and your LTV is more than 105 percent, you are effectively cut off from other mortgage lenders for your refinance.

Lenders do not seem too motivated

What about your current mortgage lender? It's not likely to help you out, either.

Imagine that you are a mortgage lender. You have a bunch of homeowners paying 6 percent to 6.5 percent when current mortgage rates are around 5 percent. They pay on time each month and cannot refinance because they owe more than their homes are worth. These borrowers are paying premium interest rates compared to the open market, making them highly-valuable assets in the lender's portfolio, even more so as interest rates decline.

So, how motivated are you, the lender, to refinance these folks into current mortgage rates, even if they have pristine credit? The answer is not very.

You are out of luck if you have lender-paid MI

Another group of homeowners who can't get a HARP refi is those who currently have LMPI.

LPMI is, as the name implies, coverage paid for by your lender. You, the borrower, pay for the premiums indirectly by taking a higher interest rate on your mortgage.

Homeowners tend to choose this arrangement when it works out to be cheaper than traditional mortgage insurance. In other cases, a home builder might pay the premium as part of an incentive to get you to buy a home. In any event, there is currently no way to transfer your LPMI coverage to a new loan--so if you still need mortgage insurance as part of your refinance and you can't get new coverage, you won't be eligible for a HARP refi.

What you can do

If you have mortgage insurance and a high LTV, is there anything you can do?

An army of angry borrowers has put together an online petition. Besides adding your name to a petition, your other options include seeking loan modification help through HARP's sister program, the Home Affordable Modification Program, or a Federal Housing Administration short refinance.

The sad thing is today, the "wrong borrowers" who aren't underwater are the ones being offered HARP refinances.

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About the author:

Gina Pogol has been writing about mortgages and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte. She graduated with high distinction from the University of Nevada with a bachelor of science in financial management.

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