A HARP Facelift? Homeowner Refinancing Act Arrives

By Gretchen Wegrich

While the possibility of HARP 3.0 remains on the horizon, a bill reintroduced by two U.S. Senators contains legislation designed to assist homeowners in refinancing into lower mortgage interest rates. The Responsible Homeowner Refinancing Act of 2013 lifts additional barriers preventing Fannie Mae and Freddie Mac borrowers from refinancing their mortgage loans at the lowest rate possible.

This isn't the first time U.S. Senators Robert Menendez (D-NJ) and Barbara Boxer (D-CA) tried to pass the legislation, which was shot down by the 112th Congress, which was in session from Jan. 2011-2013.

If passed, the bill would force GSEs to require identical streamlined underwriting and associated representations and warranties under the Home Affordable Refinancing Program (HARP) to new servicers. Currently, new servicers face stricter underwriting guidelines and are in danger of more putbacks and loan repurchases than existing servicers. The Responsible Homeowner Refinancing Act seeks to level the playing field, creating opportunities for competition between banks for borrowers' business.

Fair Terms for Borrowers

Under the expanded HARP 2.0 guidelines, FHFA continued to require lenders to differentiate between borrowers with less than 20 percent equity and more than 20 percent equity in ways that placed greater administrative burden and higher costs on the higher equity borrowers.

Although GSEs reduced initial fees for HARP loans with less than 20 percent equity, Fannie and Freddie kept the fees in place for homeowners with more equity. The result was a catch-22 wherein borrowers with significant equity in their homes who offered lenders a lower risk could actually face higher refinancing costs than borrowers with zero equity and what amounted to higher risk. The fee difference can be as high as 2 percent of the loan amount, or an additional $4,000 on a $200,000 mortgage.

The bill also prohibits GSEs from charging borrowers any up-front fees to refinance loans which are already guaranteed by Fannie or Freddie; the change is in the best financial interest of both GSEs and taxpayers.

A More Streamlined Process

GSE-backed home values are generally determined by Automated Valuation Models, eliminating the need for costly manual appraisals. However, borrowers whose homes are located in communities with a high rate of recent home sales often are unable to use the automated models and must instead pay hundreds of dollars for a manual appraisal.

The bill addresses this issue by requiring the GSEs to develop additional streamlined alternatives to manual aprraisals, benefitting borrowers and lenders alike, especially in rural areas.

An additional change that the bill would introduce is elimination of proof of employment or income. Since HARP loans are only available to borrowers who are current on their loans and have demonstrated a committment to making their payments on time --often in spite of loss of income or employment --the requirement is deemed unecessary. The GSEs already retain the risk of default, which is diminished by lower interest rates. The facet of the bill would further streamline the refinancing process and eliminate unecessary costs and hassle for both lenders and borrowers.

A HARP refinance saves the average homeowner approximately $2,500 per year. The bill would raise the amount borrowers could save and expand refinancing opportunities for millions of eligible homeowners.

The bill would be funded by itself, via reduced default rates on GSE loans, which saves taxpayers money.

The bill also extends the HARP program for another year beyond the current expiration of December 31, 2013.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.