Friday, July 3, 2009

Obama Home Affordable Refinance Plan Allows 125% LTV Financing

Some "underwater" homeowners who were previously shut out of the Obama Home Affordable Refinance Plan (HARP) may find that they have a new option to get better loan terms.

A few days ago we wrote about how the government-backed initiative to stop foreclosures through loan modifications had proven ineffective.

Previously, those who owed more than 105% on their home were ineligible for a HARP refinance. As of July 1, the loan-to-value limit for HARP refinances has been increased to 125%.

This change will help many distressed homeowners in California, Nevada, Arizona and Florida, where 100% financing and boom-to-bust price declines of 40% or more left many homeowners with no option but to "walk" because of crushing payments and no refinance options.

Although this is a step to stem foreclosures, many problems remain.

First, the program concerns only 1st mortgages. A homeowner with a $400,000 1st mortgage and a $100,000 2nd mortgage (or equity line) on a property worth $350,000 can now refinance the 1st loan, but cannot refinance the 2nd.

Second, the homeowner must be able to afford the payment on a property refinanced to 125% of value.

Third, this HARP loan modification is only for Fannie- and Freddie-backed loans.

Fourth, and most importantly, banks are not reworking loans. Stories about lost paperwork and ill-informed customer service reps telling distressed homeowners to wait 120 days for a response are Kafka-esque and reveal a broken system that is not helping homeowners or addressing the foreclosure crisis in a meaningful way.

[Los Angeles Times]