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Why is it so hard to be approved for a HARP refinance?

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The government's Home Affordable Refinance Program (HARP) was begun to help homeowners with little or negative equity refinance to current mortgage rates. As applicants for HARP refinances can attest, a program that looks straightforward on paper is much less so in reality. What's so difficult about being approved for a HARP refinance?

Getting approved for a HARP refinance

Under HARP's official guidelines, borrowers with mortgages owned or serviced by Fannie Mae or Freddie Mac should be allowed to refinance as long as their loan-to-value (LTV) ratio is 125 percent or less and they can qualify under Fannie/Freddie guidelines.

For those who have second mortgages, HARP guidelines do not place a limit on the combined loan-to-value (CLTV) ratio as long as the second mortgage lender is willing to re-subordinate its loan to the new first mortgage (meaning that the lender whose loan is in the second lien position before the refinance agrees to let it remain there after the refinance).

On the face of it, there shouldn't be much problem getting these HARP refinances approved. After all, by allowing a reduction in borrowers' mortgage payments, Fannie and Freddie lower the risk of default and foreclosure, increasing the health of their mortgage portfolios, right?

The "real-world" HARP guidelines

Unfortunately, it hasn't quite worked that way. Here are some of the major reasons why a troubled homeowner may not be able to turn to a HARP refinance. (Mortgage professional Jim Campbell echoes much of this in his recent guest contribution to the HSH.com blog, Understanding HARP's stumbling blocks will increase your success.)

  • Mortgage lender overlays to government eligibility guidelines. Just as some mortgage lenders routinely flout the government's guidelines for HARP's sister program, the Home Affordable Modification Program (HAMP)--to the frustration and disgust of many borrowers who have applied for a loan modification--many lenders have chosen to impose overlays on HARP refinances. (Overlays are increases in the minimum requirements to obtain a loan, such as an increase in the minimum credit score or a decrease in the maximum LTV ratios. Lenders do this in hopes that the loans they do make will be less likely to fail).

    These private overlays are more stringent than the requirements dictated by the program. For example, many lenders and mortgage insurers will not approve a HARP refi at an LTV or CLTV exceeding 105 percent. If you're more underwater than that, you're seemingly out of luck.

    Fannie Mae's Desktop Underwriter (DU) software certainly isn't on the side of any homeowner who is more than 5 percent underwater. According to Fannie Mae, "The DU risk assessment was updated to reflect the incremental default risk associated with LTV ratios greater than 105 percent."

    Decoded, this means that HARP refinance applications with LTVs exceeding 105 percent are treated differently by the software and are less likely to be approved. The real cutoff, then, at least in terms of Fannie underwriting, is not really at 125 percent LTV, it's at 105 percent
  • Second mortgage roadblocks. Homeowners who took out home equity loans after purchasing their property may have mortgages that do not comply with Fannie Mae or Freddie Mac guidelines, and it's doubtful they were informed of this. In fairness to home equity (second lien) lenders, there had never before been any reason to expect this change to cause problems for borrowers.

    If you're in this boat, it's not your fault, but you will not be able to get a HARP refinance. The Fannie Mae guidelines state that HARP applications ("DU Refi Plus," in Fannie-speak) with second mortgages in the mix will trigger a reminder to the mortgage lender "that the subordinate financing must comply with standard Selling Guide provisions."
  • Unintended consequences from loan mod attempts. Those who apply for a loan modification under HAMP, make trial payments, and then are denied for a permanent loan modification may end up ineligible for HARP as well.

    How does this happen? Bizarrely, reduced payments made during the trial modification period can be considered insufficient when compared to the original mortgage--even if the payments meet the agreed-upon trial modification terms. This can hurt the credit histories of HAMP applicants. Once that 30-plus-days delinquency is on the record, Fannie considers that borrower ineligible for HARP.
  • Refinance pricing. Refinancing through HARP, unlike getting a loan modification through HAMP, involves real costs to the borrower--with loan-level pricing adjustments of up to 2 percent in addition to the standard refinance costs such as origination charges, underwriting fees, appraisal expenses, and title and escrow. These expenses mean that some eligible homeowners simply won't find it cost-effective to refinance.
  • Mortgage insurance considerations. Finally, if your current mortgage includes mortgage insurance, you will not be able to shop around for the best deal: You must use your current mortgage lender and take whatever pricing it offers. If your lender imposes overlays that make you ineligible for refinancing, you are out of luck because you can't go to another lender.

To the victors go the spoils

So who does get approved for HARP refis?

Mortgage refinancing through HARP increased 30 percent in the fourth quarter of 2010, and according to the Federal Housing Finance Agency, the number of homeowners who have refinanced through the HARP plan is impressive.

However, when you look at who has been helped versus who has not, it becomes clear that this program, like other Making Home Affordable initiatives, is also beset by unintended consequences.

What many mortgage lenders discovered was that HARP is a terrific marketing gimmick. They used the program to keep from losing their best (that is, above-water) customers and were not required to provide help to those who actually needed it.

Freddie Mac reported that a mere 1 percent of HARP refis were closed for homeowners who owed more than 105 percent of what their homes were worth, and Fannie Mae lenders didn't do much better--fewer than 15 percent of borrowers with credit scores under 700 refinanced through HARP, and only 5 percent of borrowers with LTVs exceeding 120 percent got a refinance.

Housing Wire writes that with HARP refinances, "few are going to borrowers who would otherwise not be able to refinance." It concluded that such refinances were being offered preemptively to the best customers as part of client retention programs, not to render assistance to those truly in need.

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About the author:
Gina Pogol has been writing about business, mortgage and finance topics since 1994. In addition to a decade in mortgage lending, she has worked as a bankruptcy paralegal, a business credit systems consultant for Experian and an accountant for Deloitte.

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