NEW YORK (
) -- President Obama's expansion of the Home Affordable Refinance Program, or HARP, is a winner all around, for "underwater" home borrowers looking to refinance at historically low rates, for
, who can limit foreclosure losses, and for the president's reelection prospects.
It's easy to go with the knee-jerk reaction and say that the expanded refinance program simply
puts off a day of reckoning
for Fannie and Freddie -- since the refinanced borrowers will still owe more than their homes are currently worth.
But the expansion of refinancing activity will actually lower the government-sponsored mortgage giants' risk.
Not only will the borrowers qualifying for the refinancing be limited to those who have already demonstrated that they are good credit risks, the program's incentives to steer borrowers into shorter-term mortgages mean that for many of the new loans, principal balances will be repaid faster. It will also be better for the GSEs to look for some recovery in home prices over the next several years, rather than dealing with more foreclosures now, each of which could easily lead to a 50% loss.
HARP is offered to mortgage borrowers who are current on mortgage loans that are guaranteed by Fannie Mae or Freddie Mac, whose home values have dropped so much that the current loan-to-value ratio is over 80%. The program has been extended through December 2013, and is available for loans sold to Fannie or Freddie before May 31, 2009.
Under the expanded HARP, borrowers will be able to refinance for up to 125% of a home's current value, but the 125% loan-to-value cap will be removed during the first quarter of 2012.
With long-term interest rates at historically low levels, this is a wonderful time to refinance a home mortgage, and the federal government is looking to make it much easier for borrowers whose homes have lost so much value that the outstanding loan balance is higher than the home is worth.
The Federal Housing Finance Agency, which regulates Fannie and Freddie, on Monday announced, along with the two mortgage giants, several enhancements to HARP, in order to reduce "risk for Fannie Mae and Freddie Mac and bringing a measure of stability to housing markets," according to FHFA Acting Director Edward J. DeMarco.