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Will HARP Spur Mortgage Refinancing?

Ron DeLegge

Mortgage rates are still at rock bottom levels, but many homeowners haven't been able to refinance into lower cost loans. But the government wants to change that.

Two years ago, the Home Affordable Refinance Program (HARP) was unveiled to help homeowners with less than 20% in home equity to refinance into less expensive loans. But since Fannie Mae and Freddie Mac can force lenders to buy back mortgages with faulty underwriting standards, the program's success was stifled by gun shy lenders.

Since then, HARP has been overhauled. Borrowers - even those with mortgages that exceed the value of their homes - who have made their last six mortgage payments and are employed or have a source of income, could qualify to refinance under HARP. Also, loan fees charged by Fannie and Freddie would be reduced or eliminated for borrowers that refinance into shorter-term mortgages.

HARP's revamped program could spur refinancing because it permits banks (NYSEArca: KBE - News) to avoid the risk of buying back bad loans, so long as borrowers conform to the program's guidelines. HARP is expected to begin in early December.

The average rate on a 30-year fixed mortgage is 4.11%, according to a Freddie Mac survey. Fixed 15-year loans are near 3.50%. Because of restrictive lending standards and risk adverse banks, many homeowners have not been able to refinance into lower cost home loans.

Federal Housing Finance Agency (FHFA) estimates that up to one million more borrowers should be able to refinance under the new guidelines. FHFA regulates Fannie Mae and Freddie Mac. 

Mortgage loans that exceed the 125% borrowing limit of a property's value won't be eligible to participate in HARP until early next year.

HARP was originally set to expire in June 2012 but was extended through 2013.

Will HARP inject life into the beleaguered housing market (NYSEArca: XHB - News) and spur refinancing? Since roughly 60% of the U.S. mortgage market is controlled by just four banks, there is less lending competition and getting the cooperation from these large institutions will be a must.

Many problems still remain in the mortgage and housing markets, but HARP could be a start toward helping qualified borrowers to reduce the cost of their mortgages.

The 2011 performance of stocks tied to the housing market has been a mixed bag. Since the beginning of the year, homebuilding stocks have declined around 6.50%. Meanwhile, the iShares FTSE NAREIT Residential ETF (NYSEArca: REZ - News), which focuses on apartment building owners is ahead by 8.21%.

Finally, a wave of refinancing won't be good news for everyone.

Investors holding mortgage backed securities (NYSEArca: MBB - News) could lose billions of dollars in income from paid offmortgage loans. Large mortgage investors, like the Federal Reserve, will be given cash to reinvest at today's depressed rates. How will they redeploy all that capital?

More importantly, how should you be investing in the current credit and interest rate environment? ETFguide's Profit Strategy ETF Newsletter continues to advocate a fiercely independent view of world events, financial markets and the proper allocation of money. Ultimately, following the crowd is a dangerous path.

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