Steamboat Springs Editor's note: This story has been updated from its original version to correct an error.
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Dozens of Routt County homeowners have taken advantage of the federal Home Affordable Refinance Program, or HARP, to make it easier to remain in their underwater homes. And more are exploring that option daily, according to a Steamboat Springs mortgage lender.
But not everyone who is upside down in their real estate will qualify, and not all investment banks have embraced the program.
From a homeowner’s standpoint, the key to HARP is that it forgives the typical constraints on the loan-to-value guidelines banks use to evaluate mortgage refinance applications, said Kathryn Pedersen, of Yampa Valley Bank. If they can meet a long list of criteria, HARP allows people to move into lower-cost loans even when their debt far exceeds the post-recession value of the home.
“This newest HARP-2 release has potentially unlimited loan-to-value (guidelines),” Pedersen said.
That means people with good credit ratings who have been consistently making their mortgage payments might qualify for the refinanced mortgage that would create more room in their monthly budgets.
For example, someone who is stuck with 6 percent interest on a conventional loan of $400,000 could potentially refinance into a 4 percent loan even though the value of their property has slipped to $250,000, she said.
How much difference could two points make in that household’s monthly budget?
“It’s $489,” Pedersen said. “That’s a car payment.”
The HARP program is available only to people whose loans are owned by the federally sponsored companies Fannie Mae and Freddie Mac, which purchase mortgage loans from the large investment banks that underwrite and service them. Pedersen spends about four hours on every HARP application before determining whether her clients can conform to the criteria.
Not all embrace HARP
Fannie Mae is the widely used acronym for Federal National Mortgage Association, and Freddie Mac is more formally known as the Federal Home Loan Mortgage Corporation. Although they are publicly traded companies with shareholders, their financial woes led to them being placed under conservatorship by the federal government in 2008, giving the government more direct influence on its loan programs, including HARP.
Dave Roberts, president of the mortgage division at Alpine Bank, said that from his company’s perspective, it remains to be seen how effective HARP will be for homeowners.
“The program is in motion, but the smoke hasn’t cleared,” Roberts said.
He said the large investor banks Alpine Bank works with — and who service mortgage loans on behalf of Fannie and Freddie — have yet to embrace the unlimited loan-to-value ratios offered under HARP-2.
“Our investors have not come to us and said, ‘You can process HARP loans,’” Roberts said.
Smaller banks like Alpine Bank initiate the mortgages to Fannie and Freddie standards then seek to have them underwritten by the investment banks that, in turn, package and sell them to Fannie or Freddie with an agreement that the investment bank will service the debt.
Roberts said the original HARP program allowed refinancing of mortgages with a maximum loan-to-value ratio of 105 percent, and some of the banks are circumspect about the new unlimited ratio and the associated risk. Although Fannie or Freddie would own the new mortgages created by the refinancing process, Roberts said, the investor banks assume the risk of servicing what is already a troubled property because it’s underwater.
And the process is further clouded by the reticence of investor banks to underwrite and take on a new troubled property whose debt is already being serviced by a competitor.
For example, Chase Bank might ask itself, “Am I just taking over Bank of America’s problem?” Roberts said. “They have to determine if they want to open it up.”
And then there is the ongoing rub between Fannie and Freddie and the intermediary investment banks after Fannie and Freddie demanded that the banks buy back billions of dollars in bad loans.
For owners of homes that are underwater, Roberts said, the straightest path to lowering their interest rate would probably be realized when the loan originator is able to place the debt with the same investor bank that currently services the mortgage. In that case, the interests of all parties are in alignment, he said.
Devil is in the details
After confirming whether or not Fannie or Freddie owns the note on a home, the second major HARP catch is that the loan must have been securitized before June 1, 2009. The date a home mortgage is securitized is not to be confused with the date the purchase of the home closed, Pedersen said. Instead, that is the date that Fannie or Freddie purchased the note from the original mortgage underwriter.
“It would be great if in another few months they began to roll that date forward,” Pedersen said.
And another important note: People who bought their homes using a USDA loan are not eligible for the HARP program.
There are some differences between Fannie and Freddie in terms of their HARP requirements, Pedersen said. For example, Fannie has a full condominium refinancing provision, which may help condo owners in resort towns where some developments have nightly rental programs that are frowned upon by lenders. Freddie, however, is less likely to look favorably on condo refinancing under HARP.
Applying for a HARP refinance is laborious, Pedersen acknowledged, but much of the work of making certain the loan application is perfect falls upon her and her staff.
Pedersen said in addition to helping families struggling with their mortgages remain in their homes, HARP has the potential to help the local real estate market by omitting the growth of distressed properties on the market, and by keeping more disposable income in peoples’ pockets.
“If one-quarter of Routt County households saved $100 a month, that’s a huge economic stimulus,” she said.
To reach Tom Ross, call 970-871-4205 or email tross@SteamboatToday.com