HARP Now Accepting Loans With 125% LTVby Tim Manni
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?
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