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July 1st, 2009 (Modified on January 30th, 2013)

HARP Now Accepting Loans With 125% LTV

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HUD Secretary Shaun Donovan announced this afternoon that Fannie Mae and Freddie Mac will now begin refinancing loans with a loan-to-value (LTV) of up to 125% under the Home Affordable Refinance Program. Federal officials have concluded that by expanding the eligibility of the effort, more underwater homeowners will be able to refinance, spurring the recovery of the housing market:

“This decision is part of our ongoing efforts to maximize the effectiveness of the Making Home Affordable program and adapt to an ever-changing housing market,” said Treasury Secretary Tim Geithner. “By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly. It’s a crucial step in our broader efforts to get America’s housing market and economy on the path to recovery.”

How much relief will this expansion really bring to underwater homeowners? We crunched the numbers and found that a borrower with a 6.5% rate on a 100,000 loan refinancing to 5.5%, will see a monthly savings of about $64 — only about a 10% savings on their monthly payment. Assuming 2% in closing costs ($2,000), it will be almost three years before any savings begin.

Even if a borrower isn’t concerned about any savings but instead is hoping for significant improvement to their cash flow, the $64 difference doesn’t provide much of that, either.

What about ARM borrowers? “Prime ARM borrowers with recent resets who want to refinance under this program will see a step up in interest rates from the mid-upper 3% range to the mid-fives; that’s why they are unlikely to participate, at least right now,” said HSH VP Keith Gumbinger.

“It’s also worth noting that if home prices don’t appreciate, it will take homeowners who are 25% underwater [125% LTV] 10 years to get back to zero [100% LTV]. If these homeowners want to sell their homes in less than 10 years, it could result in massive short sales for Fannie and Freddie, which means more losses for the American taxpayer,” explains Gumbinger.

Does this encourage the argument that we should let markets work themselves out on their own instead of inventing new ways to save them? Is the help we are lending today going to hurt us tomorrow?

For more on this subject please read:

Is Refinancing More Underwater Loans Really the Answer?

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3 Responses to “HARP Now Accepting Loans With 125% LTV”

  1. Erica Smith Says: July 2nd, 2009 at 6:58 am

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  2. HARP Now Accepting Loans With 125% LTV | Mortgage Loan Refinance Guru Says: July 6th, 2009 at 1:33 am

    [...] Does this encourage the argument that we should let markets work themselves out on their own instead of inventing new ways to save them? Is the help we are lending today going to hurt us tomorrow? [...]

  3. vsame Says: January 4th, 2011 at 2:09 pm

    The Home Affordable Refinance Program was designed to assist borrowers who have demonstrated an acceptable payment history on their existing Fannie Mae or Freddie Mac owned mortgage loan. Unfortunately due to rising unemployment levels and increasing foreclosure rates, demand for housing has weakened and property values have continued to decline, which has blocked many borrowers from utilizing HARP.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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