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Mortgage Refinances Via HARP

Saddled with a mortgage for more than his home was worth, Eric Waugh was resigned to paying a 6% rate on a 30-year refinancing he did in 2008 — until he got a call from his loan broker with an offer he couldn't refuse: a chance to get a much lower rate and slash his monthly carrying costs.

He'd tried to refinance again as rates began to plummet. But the bank turned him down because his $416,000 mortgage was above the $369,000 appraised value of his five-bedroom home in El Dorado Hills, Calif. That was a far cry from the $540,000 it was valued at in 2008.

"When rates got really low, it was frustrating that I wasn't eligible to refinance because we were underwater," said Waugh, who bought his home in 2001 for $399,500.

Fast forward to the summer of 2012, when senior mortgage consultant Brad L'Engle at Comstock Mortgage told Waugh he'd qualify for a Home Affordable Refinance Program mortgage, called HARP 2.0, even though he and his wife were underwater on their home.

Like Waugh, many frustrated homeowners once shut out of the refi game have jumped on the HARP 2.0 bandwagon at a time when mortgage rates are at a 65-year low. Through September, the year's seen more than 700,000 HARP refis, roughly half of which went to borrowers with a loan-to-value ratio above 100%. HARP refis are forecast to top 1 million for 2012, according to HousingWire.

"The HARP 2.0 program is all about giving you an opportunity to refinance if you didn't have the opportunity," said Keith Gumbinger, vice president at mortgage information website HSH.com. Those with a pretty deep equity stake are excluded from the program, he adds.

Must Borrowers Be Underwater? HARP 2.0, which took effect Dec. 1, 2011, doesn't require that a borrower be underwater. But the home's loan-to-value ratio must be greater than 80%.

Some of the basic criteria for eligibility are that the mortgage is owned or guaranteed by Fannie Mae (FNMA) or Freddie Mac (FMCC) and had been sold to either on or before May 31, 2009. Another requirement: The borrower is allowed one late payment in the past 12 months as long as it wasn't in the six months before the refinance.

Going the HARP 2.0 route can reduce some refinancing fees, and streamlines the process. Generally, a borrower can refinance without income verification or an appraisal.

From a lending industry perspective HARP 2.0, which is outlined at makinghomeaffordable.gov, aims to curb potential defaults and foreclosures down the road — even as it also allows refis for some borrowers unlikely to end up defaulting.

Waugh was a good candidate for the program, says L'Engle, in Sacramento. He sailed through the process with no appraisal, had a good payment history and his loan to value was 100%. In October Waugh closed on a $401,000 30-year fixed rate loan at 4%, with no points or hidden fees. His mortgage payment slid to $2,450 a month — including principal, taxes and insurance — down from $3,035 a month.

HARP was launched in 2009 to help homeowners underwater or nearly so to refinance into lower-rate loans without having to buy mortgage insurance. At first it was limited to borrowers who had a loan-to-value of least 80%, but no more than 105%. The HARP 2.0 version removed the cap, cut the need for a new property appraisal and eliminated certain fees for borrowers who refinance into shorter-term mortgages of 15 and 20 years.

The biggest change under HARP 2.0 was to lift the loan-to-value cap of 125%, says Freddie Mac chief economist Frank Nothaft. That and other changes have made the program more attractive, expanded the population of borrowers eligible under it, and given a big boost to loan volume. The 709,006 HARP loans done this year through September account for 42% of those done since the program started in April 2009. A hefty 141,696 of the 1,700,000 loans completed had a loan to value of more than 125%.

Refinancing via HARP 2.0 translates into lower monthly payments, Nothaft says.

"By lowering the monthly payment, it makes it more likely the borrower will be successful over time in avoiding delinquency," he said.

HARP 2.0 offers some borrowers who are not underwater benefits over a traditional mortgage. One big one is with no appraisal required, the borrower's cost may be reduced $250 to $500, Gumbinger says.

No Proof Of Income The most important change under HARP 2.0, he adds, is that the borrower doesn't have to prove the amount of income in the household — only that there is income coming in. That is, provided that the new payment doesn't increase by more than 20% from the old one.

For borrowers who've had income disruption in the last couple of years such as a job loss, HARP 2.0 may be the best option, Gumbinger says, as a traditional mortgage will require income documentation.

Under the program's "bare minimum guidelines" there's no mention of the credit score or debt-to-income ratio important for most mortgages, adds Erin Lantz, director of the Zillow (NASDAQ:Z) Mortgage Marketplace. So maybe a borrower is not underwater but has a credit score challenge or income cut.

"HARP 2.0 may not penalize the borrower so much for that type of situation," she said. "In a traditional refinancing credit score history and income are more scrutinized."