Fine Tuning HARP Upside Homeowners

What Is Going On With HARP

Many HARP eligible AZ homeowners and HARP eligible homeowners across the country have ridden the HARP roller coaster of disappointment.   They take the ride up when they hear there is a loan program called HARP that will help them refi no matter how “upside down” they are – YAY!!!  Then, the dreaded ride back down to earth when they realize that many lenders refuse to touch their HARP eligible loan with a 10 foot pole!!

Why are Fannie and Freddie selling tickets to such an unpleasant ride?  It’s simple.  Fannie and Freddie issue guidance for HARP.  This means F and F make the rules that borrowers must meet in order to qualify for a HARP refi.  However, Fannie and Freddie do NOT actually originate a single HARP loan themselves.  They only come up with the rules the mortgage lender’s play ball by.   The one little detail that Fannie and Freddie fail to tell the public is that behind the scenes, there is a little something the mortgage industry calls “reps and warrants.”   These are the rules and agreements that dictate when an originating lender is forced to buy back a loan that they originated/closed.  Keep in mind that the goal of EVERY lender in the United States is not to buy back a single loan that they originate.  Buying back loans will put a mortgage company out of business faster than just about anything else.  Originating lenders take the borrower guidelines combined with the reps and warrants and figure out what version of HARP they are comfortable originating.  This ultimately defines the HARP mortgage product that the public ultimately as access to.

How Reps and Warrants Impact HARP Borrowers 

Think of a HARP loan as a used car.   Now, lets take it a step further.  Imagine a HARP loan is a used car with an engine that has 200,000 miles on it, worn down tires and a leaky gas tank.  Why compare a HARP loan = to a beat up used car?  In a lender’s eyes, any loan that has negative equity is a HUGE risk based on the fact that the home the lender would be financing is worth less than the collateral being offered for the loan.  In the end,  it is a home loan with problems according to the mortgage world.

Back to our used car analogy – would you buy a used car like the one described above if the dealer offered no warranty?  Probably not.  That is how a mortgage company feels when they originate a HARP loan according to Fannie/Freddie’s guidelines along with the underlying current reps and warrants.  Now imagine that the same car dealer selling the trashed used car offered you a warranty over the life of the vehicle guaranteeing they would fix anything that went wrong the car.   You might reconsider purchasing this lovely automobile.  This is exactly what is wrong with HARP and it is what is hopefully changing to allow more lenders to originate more HARP loans.

Currently, Fannie and Freddie hold originating lenders too liable for them to feel comfortable originating HARP loans to the point that they could (note: right now lenders do offer HARP refi’s with added limitations).  The end result in the marketplace is a very limited version of both the Fannie and Freddie versions of HARP.  While Fannie’s version of the program is currently more fluid and accessible than Freddie’s both are severely limited by the existing reps and warrants.  Good news – both Fannie and Freddie are currently considering loosening the reps and warrants behind HARP which may lead to more lenders offering a better and more expansive version of HARP.

One example of a changing rep/warrant is the payment default time limit.  Right now, some versions of HARP include a rep/warrant that makes the originating lender liable for up to 3 years.  That means that if the borrower that the lender closed a HARP loan for defaults in the first 36 months that lender has to purchase the loan back.  Word is that this timeframe may be cut to 12 months.  This may help lenders feel more comfortable originating HARP loans by knowing they are on the hood for 2 years less on a HARP loan.

I will be sure to post future HARP related changes as they are announced.

You can also look your current home and mortgage up on the following HARP links:

By Jeremy House
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