Last week I started a series on the ways in which UN Agenda 21 is being implemented through Smart Growth and Smart Code initiatives to radically transform the American way of life. (And I will be getting back to it in the coming weeks.) I have been in loan origination for nearly 14 years now, and I have watched the federal and local governments declare full scale war on housing in the last few years. But normally, when I tell people that home ownership is under attack in America from virtually every sector, their eyes glaze over and they answer back some version of the following: "That can't be true. After all, Obama is encouraging everyone to refinance and working to help people stay in their homes."
I spent the greater part of today doing something I have not done in a long time--calculating mortgage loan quotes for customers. Since the Consumer Financial Protection Bureau headed by Richard Cordray has announced that they will have the qualified residential mortgages ready to implement this summer, which will basically apply a tourniquet to what flow of mortgage money is left in the U.S., I thought this might be a good time to see if any of my previous borrowers wants to take advantage of truly historically low interest rates while they still have a chance at getting approved for the loan.
Having been a loan originator since 1998, I have seen both boom and bust in this industry. And I remember when borrowers either qualified for a loan or they didn't. Up until a couple of years ago, a borrower who qualified for a conventional Fannie Mae loan was eligible for whatever the best rate available that day was. Whether he actually received the best rate was an entirely different matter and depended in part on his shopping skills and who his originator was, but all in all Fannie and Freddie interest rates were offered on a pretty democratic basis. Then in September of 2008, the federal government took Fannie and Freddie into conservatorship. Suddenly these entities were no longer mainly privately held--they were now owned completely by the government. Very soon, interest rate pricing was no so democratic--interest rates were now tied to the borrower's credit scores in 20 point increments. The borrower with a 680 credit score got a better interest rate than the borrower with a 679 score; the borrower with a 740 credit score got a much better rate than the borrower with a 700 score. The new system favored the financially stronger borrower over the financially weaker one.
But as the economy worsened dramatically and families lost the equity in their homes, the federal government attempted to rush to the rescue with HARP and HAMP to help borrowers refinance their homes. Borrowers could, in theory, refinance a home at 105% and later 125% of its appraised value, provided that they could satisfy a long set of conditions and caveats. And though their interest rate and costs were not the same as the ones offered to the person with the 740 score, they still got a lower rate than their previous mortgage. Borrowers who could afford to refinance into a 15 year or a 10 year note did not have any credit score based interest rate adjustments, so those loans remained pretty democratic.
Now it is 2012, and the president has circumvented Congress once again to introduce a new wave of help to struggling homeowners. With so many Americans underwater in their homes and unable to refinance, the government is rolling out HARP 2. In this new and improved version, the borrower' s ability to qualify for a mortgage loan will not be based on the appraised value of the house. We have been promised that the borrowers will have limited obligation to prove income. We have also been promised that many of the conditions and caveats which prevented homeowners from refinancing in the past have been removed. HARP 2 will help struggling homeowners to refinance out of those pesky adjustable rate mortgages and balloon notes that they have not been able to escape and transition into the world of the fixed rate mortgage. So finally, after much trial and error the federal government has finally gotten it right. Right?
Not exactly. We all tend to forget that nothing is free. Fannie and Freddie are owned by the government, and they have lost hundreds of billions of dollars over the last 3 and a half years. So any help to drowning homeowners should naturally help Fannie and Freddie too. Rather than conduits for packaging and selling mortgage-backed securities, Fannie and Freddie are being transformed in sources of revenue for the federal government at the expense of American homeowners.
We saw the first example of this when in December Congress passed the two month payroll tax extension. To do so, they raised fees on loans offered by Fannie Mae and Freddie Mac for the next ten years. Ten years of fee increases to pay for a two month payroll tax extension? Really?
And that was just the beginning. The HARP loans were originally priced almost the same as regular refinances--they just allowed qualified homeowners to refinance a little more easily. But not anymore. I first learned of the changes three weeks ago, when I received a telephone call from a pharmaceutical sales rep who wanted to refinance her home at a lower rate. The woman (who has great income and credit scores in the 700s) was concerned that her home had lost too much value since her last refinance in 2009 and that she would not have 20% equity. She wanted me to quote her on a HARP loan. I entered the figures into the loan calculator on the website of a major lender whom I use freqently and received a real shock. This woman qualified for a 3.99% rate with no discount points using a regular rate and term refi, but using HARP her 3.99% rate had a 4% discount. That means that to refinance her $336,000 loan she would have to pay an additional $13,440.00 in fees (discount points) just to close. Presumably, these costs would roll into her loan. (Fortunately, we were able to refinance her on a conventional loan as it turned out that she did have sufficient equity to qualify.)
Today, I priced several refinance loans using HARP guidelines with the same lender. A borrower with a 675 mid credit score wanting to refinance a $400,000 mortgage loan with less than 20% equity to a new 30 year fixed rate mortgage can expect to pay up to 12% in discount points to Fannie and Freddie for the privilege of doing so. That is more than $48,000 in fees. And unlike the last incarnation of HARP, the new fees apply to both 15 and 30 year loans.
I checked with another lender and their pricing is about a 1% discount on these loans. On a $400,000 loan, that would be about $4000.00 in additional fees, which is still a lot but substantially less than lender A is quoting, so I am wondering whether Lender A--who normally has cheaper pricing than anyone else I work with--has put additional overlays on their HARP loans because they don't want to take on these loans. Will this additional pricing be carried over to HARP II? How many lenders will follow suit by raising the pricing so that they will not be stuck with upside down mortgages without charging a high premium for the privilege of making the loan.
I checked with another lender and their pricing is about a 1% discount on these loans. On a $400,000 loan, that would be about $4000.00 in additional fees, which is still a lot but substantially less than lender A is quoting, so I am wondering whether Lender A--who normally has cheaper pricing than anyone else I work with--has put additional overlays on their HARP loans because they don't want to take on these loans. Will this additional pricing be carried over to HARP II? How many lenders will follow suit by raising the pricing so that they will not be stuck with upside down mortgages without charging a high premium for the privilege of making the loan.
There is so much wrong with this new pricing model on so many levels, but as far as I am concerned, what is most wrong with it is that HARP loans are aimed at people who are unable to refinance their existing mortgages because of lost equity. These are people in adjustable rate mortgages where the initial term has expired or people in mortgages with high interest rates. When HARP 2 guidelines were announced in November, the government said that it would make these loans available only to borrowers with less than 20% equity in their homes because they were for borrowers who "really needed them." In the old days of subprime loans, loan originators and lenders who ladled on fees which stripped the equity out of borrowers' homes were considered predatory. But the price adjustments we are seeing today would make the old subprime lenders blush. The discount points for these loans will be added to the loan balance of an already underwater mortgage, further damaging an already debt-strapped homeowner. And while they will undoubtedly generate millions in revenue for Fannie and Freddie, that revenue is being generated under the guise of helping struggling Americans when in fact nothing could be further from the truth. Although the stated goal of HARP 2 is to encourage Americans to refinance into 10 and 15 year mortgage loans which they will pay off quickly, thus regaining the equity in their homes, the whole idea of implementing massive fee increases on American homeowners is outrageous. And in a climate such as the one we are in today, where many advocate "strategic default" and walking away from homes to allow them to go into foreclosure, the fee structure of the new mortgage loans may be the final push that some homeowners need to throw their hands up in the air and say "I'm Done."
Anyone seeking a HARP refinance needs to be aware that there can be wide differences in the pricing on the loans and they need to shop accordingly. Otherwise, they may end up with a refinance that is much higher cost than the loan they are trying to escape.
Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen. For more information, visit her website at http://www.frontier2000.net/.
