More underwater borrowers shorten mortgage under HARP

More Fannie Mae and Freddie Mac borrowers who owe more on their mortgage than their home is worth chose to refinance into shorter-term loans in order to rebuild equity faster, according to the Federal Housing Finance Agency.

Roughly 19% of homeowners who are more than 5% underwater chose 15- and 20-year terms when offered a workout under the Home Affordable Refinance Program. That percentage is more than double the average in 2011, according to the FHFA report.

Borrowers can move from a 6% or 7% loan into today’s mortgage rates, which seem to be breaking record lows every week. Keeping the monthly payment the same but with this lower interest allows them to put more of their dollars to the principal. This, in turn, helps them rebuild equity faster. Most underwater borrowers still remain current on their payments. 

Department of Housing and Urban Development Secretary Shaun Donovan held a Google Hangout meeting online with homeowners last week, touting several bills that could possibly extend more refinancing opportunities to underwater borrowers.

One bill from Sen. Jeff Merkley, D-Ore., would allow borrowers to refinance their loans into even shorter-term limits and Fannie and Freddie would cover any closing costs.

FHFA expanded the program last year, stripping out limitations on loan-to-value ratios and some repurchase risk on the original loan file. It also waived appraisal requirements and other upfront fees to boost the program.

HARP spiked in the first quarter when 180,000 Fannie and Freddie borrowers received a refinance under the program. Nearly 80,000 went through HARP in March alone.

HARP accounted for 20% of all refinancing activity in May, the highest percentage since the program launched.

According to FHFA data released Monday, another 117,000 borrowers went through HARP in April and May, though June numbers are not yet available.

Of those, roughly 30,000 had LTVs between 105% and 125%, the original ceiling on the program.

Nearly 6,000 borrowers went through HARP with an LTV score higher than 125% in April and May.

Analysts at Barclays Capital (BCS) said in a report over the weekend that some servicers are beginning to slow HARP refinancing, according to the latest data in July, though Bank of America (BAC), the largest GSE servicer, is still ramping up production.

More than 11 million borrowers are underwater on their mortgage, though that number is declining. More than 4 million hold loans owned by Fannie and Freddie.

“These numbers show HARP 2.0 is accomplishing the goals set forth—to provide relief to borrowers who might otherwise be unable to refinance due to house price declines,” said FHFA Acting Director Edward DeMarco in a statement. “Borrowers with Fannie Mae- or Freddie Mac-backed loans who are current on their underwater mortgages are taking advantage of the opportunity offered by HARP 2.0.”

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