Taking advantage of the expanded Home Affordable Refinance Program becomes sharply more difficult for borrowers forced to go through a new mortgage lender, according to many industry executives.

The Federal Housing Finance Agency trimmed HARP guidelines last fall to help more underwater borrowers with Fannie Mae and Freddie Mac loans refinance into historically low rates. Banks finally installed the new program in March, and HARP totals doubled in the first quarter to 180,000 refinanced in those first three months alone.

Beneath the data, the story on the ground shows an imbalanced program in favor of the largest banks. If a borrower's servicer does not participate in the program, he or she must go through a new mortgage broker. The broker would then have to fund the new refinanced loan through a wholesaler. But most wholesalers aren't participating in the program because the broker is getting high-risk alerts from Fannie and Freddie.

"It's probably a tougher underwrite than a regular deal," said Mike Metz, who runs one of the largest mortgage brokerage houses out of Phoenix Sun State Home Loans. "It is not at all what the consumer thought they were getting. You can see that looking at the number of wholesalers scaled back out of the program."

Approved Eligible

Arizona home prices fell more than 51% since their peak as of March 31, pushing many homeowners underwater, according to Fannie Mae. Metz said he's taken more than 1,000 HARP applications in Phoenix since March. He expects maybe half to go through.

The FHFA eliminated limits on how underwater a borrower can be to qualify for the program. Previously, a borrower would be ineligible if he or she owed above 25% more on the mortgage than the home was worth.

But even though they qualify, Fannie Mae will send a borrower either an "Approved Eligible" or an EA 1, 2 or 3 score based on risk. The more underwater or the fewer assets a borrower has, the worse the score. Only one wholesaler CMG Mortgage in California will fund these risky loans, according to several brokers.

Christopher George has been CEO of CMG since he started the company out of his garage in 1993.

"We're just doing a more thorough job, making sure the data is being checked repetitively once the loan is sold (to Fannie or Freddie). If there is a default, we make sure that the default doesn't find it's way back to me," George said in an interview.

As part of the expansion last year, FHFA eliminated repurchase risk for the original servicer. Not so for any new lender, meaning if the loan defaults and the GSE finds something wrong with the underwriting guidelines, the lender like George will have to buy it back. The risk doubles because any new lender has to verify income when the original servicer does not. Sometimes, new appraisals are even required, especially on some Freddie Mac loans, according to some brokers.

Most wholesalers do not want this risk. In April, Flagstar Bank (FSB) stopped funding HARP refinancings with Freddie, according to several Flagstar brokers. Quicken Loans also scaled back its programs.

George is wary of the risk, too. For any Fannie EA 3 scores – which signals the highest risk – he has a team reverify every aspect of the loan.

"The most repurchase trouble surrounds the appraisal. Value is the most subjective component, and a big segment of the risk," George said.

CMG took in roughly 6,000 applications since the revamped program rolled out in March. George closed roughly 3,000 of them.

His average LTV score getting approval is 135%.


In Nevada, home prices dropped more than 61% from their peak. Two-thirds of all borrowers in the state are underwater.

But, according to the FHFA, only 12,000 loans refinanced through HARP in Nevada since the program launched, roughly 1% of the 1.2 million done in the entire country.

"Most aren't going through," said Mark Baker, who runs the brokerage Sierra Pacific Mortgage in Las Vegas. "Conservatively, we've gotten 300 loan applications. We may close 50 of them. We've got borrowers who are furious. But CMG is the only game in town."

Back in Phoenix, Metz dedicated one employee to find a way through.

She sits at the Desktop Underwriter, Fannie's portal brokers use to sale mortgages through, and adjusts possible debt-to-income ratios, LTV scores, assets and other variables to figure out what different thresholds can be reached for approvals in the system. It gives him some idea if a loan will close or not, so he can temper a borrower's expectations when they come in his door with an actual mortgage.

If a loan comes in with an extremely high LTV that breaks one of the thresholds his employee has come up with, Metz can warn the borrower ahead time that he may not be able to get the loan through. If the borrower has a lot of assets to balance out the high LTV score, the refinance becomes less risky. It all depends on the still evolving program, he said.

"It's almost like video poker," Metz said.

The largest banks charge borrowers more, according to the brokers. Those who think they're going to get a sub-4% interest rate are often disappointed.

Baker in Nevada said one of his borrowers with a high FICO score, plenty of assets and underwater on the loan ended up with a 4.65% rate on a HARP refinance with one of the big-four lenders.

Bill Willbanks, a broker with Orlando Mortgage Masters in Florida, said when he sends a pay order to one of the large banks, notifying them that the loan will be prepaid and refinanced, the bank contacts the borrower directly and offers a lower rate than Willbanks can. The big lenders often take business out from under brokers this way, he said.

Willbanks also said most wholesalers are simply not participating. The repurchase risk is just too high.

"They got rid of some rep and warrants, but lenders didn't care. They didn't want to buyback someone's paper later on," Willbanks said.

An evolving program

A spokesman for Fannie Mae said the EA scores are still deliverable to the GSE. It's up to the wholesaler to determine what kind of risk they want to take on.

"We're aware of some of the challenges at some of the warehouse lenders at this point," the spokesman said. "We can't make any promises or guarantees, but we'll look at whatever we can do."

Sens. Robert Menendez, D-N.J. and Barbara Boxer, D-Calif. reintroduced a bill this year to expand HARP even further. Specifically, they want to spread repurchase relief to all lenders, not just the original firms.

"The lack of competition results in higher prices for new HARP 2.0 mortgages than otherwise would have existed. Simply implementing more competition could help million of underwater borrowers in short order," Bill Emerson, CEO of Quicken Loans, told a Senate committee in May.

When asked if the bill would cure the headaches with the program, Metz in Phoenix said "absolutely."

"With Menendez-Boxer, these issues go away," Metz said.

The program, said George at CMG, is still doing what it was meant to do, as evidenced in the March spike. His borrowers often save about $300 on their monthly payments, and they tell him they use those savings to pay down other debt. This surprised him. Economists often point out the savings will be spent buying things, thus stimulating the economy.

George thinks HARP actually does more than that.

"We've moved away from the mentality maximizing leverage and gone to maximizing deleverage," George said. "It's helping a lot of people."