Westcoe Realtors, Riverside California…We know that this will come as a huge shock, but the jungle drums are beating loudly in the real estate world about potential problems with this “new and improved” version of refinancing for underwater home owners. Harp II is supposed to make it possible for those home owners who owe more than their home is worth to easily refinance with any lender without worrying about the appraisal or qualification process (there are details, but this is the gist of Harp II). If your loan is “owned” by FNMA or Freddie Mac, you are eligible…and any lender can help you, according to the government.
However, we are hearing stories now about many lenders who are not participating in the program, or are only doing refi’s for those loans in which they did the original loan….not for any new borrowers.
So what gives? Well…it is possible that there is a huge battle brewing under the radar between Fannie and Freddie and all those lenders who sell their loans to these institutions…and here is our take on what is really happening.
First, you will need to understand the following with regards to loans sold to Fannie/Freddie by your local lender.
1. When a local lender sells a loan they originate to Fannie/Freddie, if the loan goes into default (ie: the borrower misses a payment) within the first 12 months, the local lender must buy the loan back from Fannie/Freddie. That means if a borrower got a loan for $250,000, the local bank recouped their $250,000 when they sold it to Fannie/Freddie…and must repay said $250,000 to Fannie/Freddie if the loan defaults within 12 months.
2. If a default occurs after the 12 month origination date, then Fannie/Freddie has to deal with the problem…unless Fannie/Freddie can claim/prove loan fraud by the local originating lender. In that case, there is no time limit…the local lender must buy the loan back.
3. Fannie/Freddie currently have a HUGE percentage of their loans where they dealing with loan defaults…many past the 12 month origination deadline…and rumor has it they are scouring these loans for evidence of loan fraud. Depending upon which side of the coin you are on, either Fannie/Freddie are pursuing their legal right to send loans back to the originating lender for repayment, or Fannie/Freddie are using every little “ticky-tack” excuse to get the originating lenders to cough-up some money…money the local lenders feel they do not owe. Time will tell on this one, but the bottom line is that many lenders are concerned about sending new loans to Fannie/Freddie for fear that they will have to repurchase them later on some ridiculous technicality.
4. History has shown that a large percentage of previously modified loans have resulted in defaults. Perhaps this is because the home is still too far “underwater” to make the seller continue the new payments, or the economy, or who knows what…but the bottom line here is that modifications have a very high rate of default.
5. And lastly, AND MOST IMPORTANTLY, when a local lender does a Harp II loan modification, if it is a loan that was originated by them in the beginning, the 12 month clock starts from the date of the first origination. If the local lender did not originate the loan, then the 12 month clock starts from the date of the Harp II loan date.
Now…let’s put this all together.
The bottom line here, in our trench level opinion, is that local lenders are afraid of making Harp II loans to new customers because they know the default rate is high for loan modifications (especially when there are no appraisal or qualification standards for such loans), and they do not want to have to repurchase these loan mods within a new 12 month period. Therefore, some lenders are refusing to get involved in this program at all, and those who are participating, are only doing so with loans they originated in the beginning, thereby reducing (or even eliminating) the 12 month buy-back date in case the loan modification goes into default.
Since many local lenders think that Fannie/Freddie are looking for ways to send defaults back to the local lenders, and loan modifications have a high default rate, the local lenders are very, very reluctant to make a new loan with a new 12 month clock. If they are going to make any new loans under this Harp II loan program, it will be to customers with an “old” 12 month clock, not a “new” one.
It appears that Harp II has the possibility of being another case where the government, in trying to solve one problem, simply creates others to take it’s place. Also, as we have stated in this blog space before, it is one thing for the administration to mandate loan programs for the banks to follow, and it is quite another for the banks to listen to the government. As we have all seen, banks continue to march to their own drummer.
In the end, we hope our assumptions outlined above are incorrect, but we fear they are more right than wrong. Therefore, our best advice for those of you who really need a modification is to try very hard to go back through your originating lender. If that is not possible, then discuss this with the new lender who is doing Harp II Loans, and perhaps they can put you at ease with their success rate.
Oh..and don’t forget…no matter who you use for your new Harp II loan, make sure you bring along a huge dose of patience. Our experience is that you will need it.
Take care, and thanks for reading our blog.