‘Put-back’ relief at center of HARP mortgage fix.

Fewer lender appraisals translate into lower costs for borrowers, analysts say

WASHINGTON (MarketWatch) – Lenders hoping they won’t need to repurchase faulty mortgages when they refinance home-loans are focusing on a new Obama administration effort that wants to help them out.

At issue is the White House’s Home Affordable Refinance Program, which seeks to provide refinancing options to underwater borrowers who have no equity in their homes, as long as their mortgage is backed by Fannie Mae and Freddie Mac, the government-controlled housing giants.

So far the HARP program has helped far fewer borrowers than its proponents estimated -- roughly 894,000 borrowers since Aug. 31. -- and many less than the estimated 11 million U.S. homeowners who owe more than their homes are worth.

To reverse that trend, on Oct. 24 the Federal Housing Finance Agency announced a revised program, with more details expected to be released by Tuesday, Nov. 15, the same day the agency’s chief, Edward DeMarco, is scheduled to testify about the program on Capitol HIll.
Read about how the revised HARP program targets the hardest-hit borrowers
FHFA estimates that by the end of 2013, HARP refinances will double. Regulatory observers say that DeMarco has made enough tweaks to the program that his prediction may actually come true.
“We are of the opinion that there are enough changes to the program that bank servicers could really change their behavior, and this could be one of the first times that the administration has under-promised and over-delivered,” said Brian Ye, analyst at J.P Morgan Chase & Co.

The put-back risk

A major change focuses on the “put-back risk” -- the possibility that the bank originating or refinancing the loan will have to repurchase it from Fannie and Freddie because the underwriting violated the two mortgage giants’ guidelines.
Some big lenders have been hesitant to participate under the original HARP program, in part, because of their concerns about assuming the put-back risk.

However, according to Federal Housing Finance Agency officials interviewed by MarketWatch, lenders participating in the revised program will have relief from defects associated with the underwriting and documentation of the original loan.

Specifically, the new regulations eliminate the need for the lender to obtain an appraisal in many markets. Not only does this limit costs to borrowers and simplify the refinance process, but it also gives lenders put-back risk relief, the FHFA officials said.
Previously, lenders were responsible for the appraisal value and in situations where the value they provided for the loan was inaccurate, they had to repurchase the loan from Fannie or Freddie.

With the new approach, if Fannie and Freddie stipulate the property was worth a certain amount, as it will be doing on many new HARP-refinanced properties, it will be more difficult for the two mortgage giants to say the lender misled them on the property value, the government officials said.
Manoj Singh, a special advisor to the Collingwood Group and former Freddie Mac Senior Vice President of Pricing and Securitization, said giving lenders put-back relief is a major step forward to convincing big lenders to take part in the program.

“I think there may be some exceptions in the case of fraud, but it is a major step and it is big relief for the lenders and will encourage them to go ahead and crank up their HARP machines,” said Singh.
Singh said even the extension of the deadline will help the program succeed. The revisions extended the end date for HARP until Dec. 31, 2013, for loans sold to Fannie and Freddie on or before May 31, 2009.
Sarah Wartell, executive vice president of the Center for American Progress, said eliminating the appraisal also will be helpful for borrowers, many of whom have been reticent to spend the money on an appraisal, which can cost up to $400, and then later find they don’t qualify for HARP.

Expanding the eligibility pool

Rick Sharga, executive vice president at Carrington Mortgage Services, said he did not believe it was unrealistic for the program to double the number of HARP refinancings.
He said the program’s new plan to expand the number of eligible underwater borrowers will help. The original program only allowed borrowers to refinance with a mortgage that was at most 25% more than the home’s current value. With the changes, all underwater borrowers can participate, even homeowners with deeply underwater mortgages.
By Ronald D. Orol, MarketWatch

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