Did that get your attention?   It should.   Let me say this before we go into this topic- I hope I am wrong.  For the sake of millions of borrowers nationwide who deserve a better interest rate, I hope I am just jumping to conclusions.  The HARP 2.0 program was announced in November of 2011 and does not start until next month.  The goal was to enable homeowners who are current on their payment but underwater on their mortgage the opportunity to take advantage of historic low rates.  There are, however, some disturbing signs that this latest effort to help homeowners will be a bust even before it even gets going.   Here are some of the reasons why this is possible:

• The Administration is already distancing themselves.   In a speech last week, President Obama called on Congress to help homeowners who were underwater on their homes.   His proposal has already come to be known as Harp 3.0.   So the question is this- if HARP 2.0 is a success, why introduce HARP 3.0?   HARP 2.0 appeared to be a very good attempt at helping homeowners.   It addressed the shortfalls of the original HARP program and other attempts that had previously failed.   On paper it should have been a home run.   So why is the President saying this? “I’ll be honest — the programs that we put forward haven’t worked at the scale that we hoped.”   Without taking political sides, the President took a huge risk in putting forth this program.   Millions of American’s finally thought they were going to be able to refinance.   If the program is a failure, many will hold the President accountable.  In my opinion, he realizes that and is trying to get ahead of the situation.
• Rate savings just not there.   Again, the HARP 2.0 program is not even out but already there are indications that the failure is going to come in the form of interest rates on the new programs.  When the program was annouced, the guidelines stated that everyone who was current on their mortgage and had a loan owned by Fannie Mae or Freddie Mac would be eligible no matter how much they owed on the property.  That is the key word – eligible.  All of these borrowers are eligible.   The problem is that the rate on the new loan will still be based on a combination of loan-to-value, credit score and other factors.   In short, the rate on these new loans may not be much lower than the rates these borrowers currently have.  That means little to no payment savings each month.  As part of that, while no traditional appraisal is required, an automated value method will be used and the value obtained will be used to price the loan.
• Lenders and Investors still might not be ready.  Currently, we are awaiting a March 17, 2012 rollout of changes to Fannie and Freddie’s automated underwriting system.   Many believe that to be the date that we will start being able to process and close these loans.   But there are many indications that, even, we won’t be ready to go.  For one thing, we still have no idea how to deal with loans that currently have “private mortgage insurance” (PMI).   This is just one of many questions that remain unanswered.

I was very hopeful when I heard about HARP.   And I still hold out some hope that it will work.   At the very least, the indication is that it simply won’t be as good or as helpful as we hoped.   Rates remained steady this week and are expected to continue at or near record lows for the coming months. 

In 2005, the Federal Housing Authority (FHA) had about $350 billion worth of mortgages on its’ books.   When the market exploded, many borrowers that previously shunned FHA found those loans to be the only ones available.   The result – the FHA now has over $1 trillion in loans (about 7.4 million borrowers) under its’ insurance coverage.   As a result, FHA has been forced to raise both the initial and monthly MI insurance amounts.   Now the FHA is under pressure to take over loans not currently owned by Fannie, Freddie, or the FHA and rewrite them into new loans with lower rates and terms.   The goal is to expand those borrowers eligible for refinance to include jumbo loans and others who don’t currently qualify.   The biggest issue, at this point, is not just how will this be handled, but who has the power to oversee and regulate the changes.   Unlike the President’s recent HARP 2.0 program, FHA will be subject to the U.S. Congress on this one.  As more details emerge in the coming weeks, we will talk more about it.

In an appearance in Virginia earlier today, President Obama’s speech was centered primarily on housing.   In the speech, he calls on Congress to do more for “responsible” homeowners.   The assistance would only be for borrowers who are current on their mortgages but can’t refinance as they are underwater.   He advocates a surcharge on banks that would be used to allow more homeowners to refinance to lower interest rates.   We can obviously debate whether a surcharge is the right thing to do - but I won’t do that here.   The HARP 2.0 program is set to address those very issues and is rolling out in the next 45 days or so.   My concern- are these comments a realization that HARP 2.0 may not work?   From a political sense, HARP 2.0 is a huge deal for the President.   He intended to create a program that can save millions of people each and every month and allow them to refinance.   On the flip side, if that program fails to deliver, will potential voters hold that against him?   The states with populations most set to benefit from HARP are Florida, Texas, Nevada, California- all huge states in the election.   Are his comments today an attempt to side step his HARP efforts?  The biggest potential issue for HARP 2.0′s success is whether rates on these new loans end up being low enough to truly help borrowers.   If the program comes out and average rates are 5.0% or more, then very few borrowers will really see savings.   It may seem like I am overly doubtful, but we have seen these programs fail before.  

As if mortgage giant Freddie Mac needed any additional reason for people to dislike them, a recent investigation will only add to their bad image.   The investigation revealed that Freddie Mac traders made almost $5 billions worth of trades called “inverse floaters” in late 2010.  These trades, similar to derivatives, placed bets against current borrowers based on overall interest rates.  In short, if current Freddie Mac borrowers were unable to refinance into the lower rates currently available, these “bets” would pay off for Freddie Mac.  The stated goal of Fannie and Freddie are to make home loans more accessible.   The problem- Fannie and Freddie both hold billions of dollars of higher-priced mortgage debt and a refinance boom could hurt their bottom line.   With HARP 2.0 just rolling out and the President forcing these agencies to help borrowers, how much are they really going to do?   This is just more evidence that borrowers interests and the GSE’s simply don’t match.

It probably won’t surprise anyone to hear this- but the Internet is the future.  And some of that future is now here- at least for mortgage lending.   Our new website, www.homeloanstoday.com, has officially launched.   The site culminates from months of planning and hundreds of hours of programming.   Here are some of the highlights of the new site:

• Rates, terms and fees are automatically updated 24 hours per day based on market conditions
• Borrowers are now able to set up a secure, online accounts to review loan documents, submit loan conditions and track the status of their loan.
• Customers can use Chat and Skype functions to speak directly with a loan officer
• Customers can view rates and fees with live and up to the minute pricing and can choose to lock their rates online
• Upon initial application, an eligible borrower can get a  Fannie Mae or FHA loan approval electronically without speaking to a loan officer

This site will allow me, as a loan officer, to provide unparalleled service to my clients and business partners.   In addition, we are able to cut the costs of loan and pass those savings along to our clients.  This cutting edge technology will empower my customers in the loan process and create true transparency in the loan cycle.   I am very excited to be a part of this new movement and give even more value to my clients and partners.

Mortgage rates remained steady last week.  The announcement by the Federal Reserve to keep short term rates low for another two years has taken some pressure off mortgage rates.  The continuing uncertainty surrounding Greece and its’ budget woes will also play a factor in the direction that rates are headed.   All in all, rates should remain relatively consistent for the coming month or so at a minimum.

As details continue to leak about HARP2, I am concerned about some things I learned this week.   Fannie Mae published its “Loan Level Pricing Adjustment” matrix.   Before anyone gets too excited- they have not published rates- only an index they will use to price loans.  There are adjustments for total loan-to-value, credit score, occupancy status, loan term and subordinate financing.  All of those factors WILL BE considered in determining the rate for the new loan.   There is a common belief (the public and the media) that those factors would not affect rate- that’s not going to be the case.   Fannie Mae will place a cap on the fees it will charge to lenders when they buy the loan- but the matrix allows significant upcharges.   In short, lenders at the wholesale level will be able to make a significant spread on these loans.   Will they try and make that spread?  Will competition for this business keep rates down?  I certainly hope so…  For this program to help as many as intended, we need rates to be low.   If pricing on these loans does not come in the low 4% range, it simply won’t be enough to provide a real benefit.

Today, the Federal Reserve announced that they would be keeping rates at their current levels through at least the end of 2014.   The decision to leave rates alone, combined with the duration of the commitment (almost 36 months) will help keep short term rates in check.   In prior announcements, the Fed has not ever committed to such a long term promise.   The announcement is seen as positive one for the economy as a whole which should help keep borrowing costs down for businesses.  

In November, the House Committee on Oversight and Government Reform formally requested that Federal Housing Finance Agency (FHFA) answer specific questions on principal reduction for government owned or secured loans.   The current FHFA Director Edward J. DeMarco responded late week.   In short, there was no question that the agency does not feel that principal reduction will benefit taxpayers.  The FHFA feels, in short, that its’ role as overseer of the GSE’s prevent it from not only authorizing these reductions but advocating them as well.   The belief is that reductions will ultimately harm the portfolio that it manages.  The consensus in the agency is that current Federal rules in place for borrowers (like HARP and HAMP) are sufficient to address the issues facing borrowers.   In short, don’t expect the GSE’s to embrace principal reduction now or anytime soon.

Like many other in the industry, I am bullish on HARP.   So much so that I would estimate that if the program succeeds as intended, it could rescue the mortgage and real estate industries and significantly improve our overall economy.   Imagine- over 40 million households potentially able to refinance for a lower rate.   That would put hundred’s of dollars more into their monthly budget not to mention the impact on the mortgage and title industries.   There is, however, the chance that just like other programs introduced, it simply might not work.  Based on everything we have seen thus far, it seems unlikely that the program will be a total bust.   There are chances that because of conditions beyond our control, the benefits may not be as substantial as first thought. 

The biggest challenge affecting the HARP 2 program’s success or failure is going to be rates at this point.   For those unfamiliar with the program requirements, borrowers must have  loan with Fannie or Freddie in good standing that was opened prior to June 1, 2009.   There will be no requirement for asset or income documentation and no appraisal required.   Loans for second homes and investment properties as well as condominiums will all be allowed.   With all of that in mind, it begs the question, are all loans equal?   Should a loan for an investment condo carry the same rate as a primary residence?  Even in terms of helping the most people possible, there has to be some sort of risk and therefore risk-based pricing applied to these loans.   Fannie and Freddie seem to agree- although appraisals will NOT be required, the agencies will be applying an automated value program (AVM) to these loans to get an idea of loan to value on the new loan.  With this being the case, it is almost certain that some sort of pricing matrix will be used.  The level of rate adjustments will be the single biggest factor in how beneficial this program ends up being. 

When the program was introduced, industry insiders were surprised.   It seemed to address all of the shortcomings of HARP 1.0 and other relief programs.   The reps and warrants were gone.   What does that mean?  In short, a mortgage lender is now graded on how a mortgage performs.  If a mortgage company issues a loan that fails to perform (i.e. doesn’t pay), then they will have a mark against them.   Make enough bad loans and you can lose your ability to make loans.   It was a good way to make lenders accountable and reduce bad loans.   But HARP 2 will lift this requirement for lenders.  Since HARP 2 loans will be inherently risky, removing these reps and warrants are the only way lenders will participate in this program.   Even with those changes, lenders are going to want to price in the increased risk on these loans.   Make no mistake, lenders and investors want you to repay your loans over time- that’s how their investment works.  They don’t want to foreclose (sorry media) and they don’t really want to make Fannie and Freddie pay.  Risk is a huge question in this program.

Rates were up over the last week.   A pricing adjustment hit Fannie and Freddie conventional loans (a gift from Congress) and the markets were volatile.   Economic reporting continues to improve making Treasuries less desirable for investors.   With less demand, expect continued rate pressure.

It is a relatively new idea that most people have not heard about.   In short, it is a modification of a borrower’s current loan where principal is reduced to current market value.   The catch?   If and when the borrower sells the property, the bank or mortgage company that wrote off principal is entitled to a share of the increased value of the property.   The goal is to encourage banks to write down principal on loans while getting some later consideration.   The idea probably won’t go far but expect to see it discussed in the coming months as HARP rolls out and some borrowers are still left out.