• Much of this increase is driven by a spike in HARP participation.Roughly one in three borrowers applying for refinancing today is applying for a loan through HARP, up from less than one in ten a year ago.
The Kellers story and today’s data make clear that the executive actions announced by the President last fall are having an outsized impact – bringing refinancing relief to tens of thousands of families across the country. However, there are still critical barriers that still stand in the way of the President’s goal that every responsible family that has been paying their mortgages on time should have an opportunity to save thousands of dollars by refinancing at today’s historically low interest rates. That is why the President is urging Congress as part of his “To-Do List” to take action to remove these remaining barriers.
The President’s plan for congressional action has three key components:
1. Remove the final barriers for borrowers with GSE insured loans:Common sense reforms that come at no cost to taxpayers and would apply to approximately 12 million borrowers, unlocking competition between banks for borrowers’ refinancing business and eliminating fees and appraisal costs. These steps will increase the number of families who can save on average $3000 a year by refinancing.
Cutting red tape: Some borrowers still need manual appraisals to determine if they are eligible for refinancing, which can take lots of time and cost up to $1,000. Under the President’s plan, the GSEs would be directed to expand their automated valuation processes, eliminating a significant barrier that will reduce cost and time for borrowers and lenders alike.
Increasing competition so borrowers get the best possible deal: Today, lenders looking to compete with the current servicer of a borrower’s loan for that borrower’s refinancing business continue to face barriers to participating in HARP. This lack of competition means higher prices and less favorable terms for the borrower. The President’s plan would extend the same streamlined underwriting currently enjoyed by the borrower’s existing lender to the rest of the market, leveling the playing field and unlocking competition between banks for borrowers’ business.
Extending streamlined refinancing for all GSE borrowers: The President’s plan would finally extend these steps to streamline refinancing for homeowners to all GSE borrowers. Those who have significant equity in their home – and thus present less credit risk – should benefit fully from all streamlining, including lower fees and fewer barriers. This will allow more borrowers to take advantage of a program that provides low-hassle, low-cost access to today’s low interest rates – and make it easier and more automatic for servicers to market and promote this program for all GSE borrowers.
2. Providing simple, low-cost refinancing opportunities for non-GSE borrowers: The President’s proposal would also extend access to streamlined refinancing for borrowers who’ve been paying their mortgages on time to those who currently do not have a loan backed by the GSEs to FHA. This would be run through the FHA and open up today’s low rates to another 3-4 million families.
Open to borrowers who are current on their mortgages: The refinancing program will be open to all non-GSE, non-FHA borrowers with standard loans who are current on their mortgage, meet a minimum credit score, meet FHA loan limits, and live in a single-family home that they own.
Streamlined process: Borrowers will apply through a streamlined process designed to make it simpler and less expensive for borrowers and lenders to refinance.
Example of how this works: A borrower has a non-GSE mortgage originated in 2005 with a 6 percent rate and an initial balance of $300,000 – resulting in monthly payments of about $1,800. The outstanding balance is now about $272,000 and the borrower’s home is now worth $225,000, leaving the borrower underwater (with a loan-to-value ratio of about 120%). Though the borrower has been paying his mortgage on time, he cannot refinance at today’s historically low rates. Under the President’s legislative plan, the borrower would be eligible to refinance into a 4.25% percent 30-year loan, which would reduce monthly payments by about $460 a month.
3. Giving Borrowers an Incentive to Rebuild Equity in their Homes: All underwater borrowers who decide to refinance will have a choice: they can take the benefit of the reduced interest rate in the form of lower monthly payments, or they can apply that savings to rebuilding equity in their homes. The latter course will give the majority of underwater borrowers the chance to get back above water in five years or less.
Covered closing costs: To encourage borrowers to make the decision to rebuild equity in their homes, we are proposing that legislation that would cover the closing costs of borrowers who chose this option – a benefit averaging about $3,000 per homeowner.
Example of how this works: A borrower has a 5.5 percent $216,000 30-year mortgage originated in early 2007. The loan now has an outstanding balance of $200,000, but the house is worth $167,000 (a loan-to-value ratio of 120%). The monthly payment on this mortgage is $1,228. While this homeowner is responsibly paying her monthly mortgage, she is locked out of refinancing. By refinancing into a 4.0 percent 20-year mortgage loan, this borrower keeps her monthly payments effectively the same. After five years her mortgage balance would decline to $165,000, bringing the homeowner above water.