11

HARP 2.0

HARP 2.0 – Music to Distressed Borrowers’ Ears or

Sound and Fury, Signifying Nothing?

Jim MilanoFed Kamensky

Introduction

Topics to Cover:

• General HARP requirements – HARP 1.0

• How HARP is administered by the GSEs

• Important changes announced on October 24, 2011 – HARP 2.0

• Beyond HARP 2.0 – HARP 3.0?

Things to Remember:

• HARP applies only to GSE loans

• There are two HARPs – Fannie Mae HARP and Freddie Mac HARP

• Each GSE has different versions of HARP

– E.g.: Fannie Mae has a manual underwriting version and a Desktop Underwriter version

• Important changes announced on October 24, 2011 (HARP 2.0)

• However, actual effective dates may vary – some changes are not effective until March, 2012

And remember, HARP is HARPer-technical!

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HARP Background• The Home Affordable Refinance Program (HARP) – allows responsible

borrowers to refinance into a new loan even if they owe more than the current value of their home (“underwater borrowers”)

• Originally introduced on March 4, 2009 as part the Making Home Affordable (MHA) program, which also includes:

– Home Affordable Modification Program (HAMP)

– Second Lien Modification Program (2MP)

– Home Affordable Unemployment Program (UP)

– Home Affordable Foreclosure Alternatives (HAFA)

• Objectives of HARP

– Provide a refinance opportunity to borrowers who have been making timely payments but are unable to refinance because their property value has fallen

– Enable borrowers who owe more than their home is worth to take advantage of today’s low interest rates and other refinancing benefits

– Put responsible borrowers in a better position by reducing their monthly payments, lowering the interest rate, shortening the amortization period or moving to a more stable product

• Through January, 2012, approximately 998,000 loans refinanced under HARP [according to http://portal.hud.gov/hudportal/documents/huddoc?id=JanNat2012_Scorecard.pdf]

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HARP 1.0

General Eligibility Requirements

• Original mortgage must be owned or guaranteed by one of the GSEs—the program is limited to Freddie Mac and Fannie Mae loans

– Borrowers can use GSE loan look-up tools • www.freddiemac.com/mymortgage• http://www.fanniemae.com/loanlookup/

• Original mortgage must have been owned or guaranteed by the GSE on or before May 31, 2009

– Mortgages purchased by the GSE prior to June 1, 2009 or placed in a pool with an issue date prior to June 1, 2009 qualify

– Mortgages purchased on or after June 1, 2009 are not eligible

• Mortgage cannot have been previously refinanced under HARP

– One exception: Fannie Mae loans that were previously refinanced under HARP from March to May of 2009

• Current loan-to-value (LTV) ratio greater than 80%

– Other refinance options are available through GSEs for LTVs of 80% or less, but such low LTV loans do not qualify for refinance under HARP

• Ineligible Existing Mortgages – second mortgages

– loans with outstanding repurchase requests

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HARP 1.0

Mortgage Payment History Requirement

• The borrower must be current on the original mortgage at the time of refinance and must have a good payment history in the past 12 months

– Under HARP 1.0, payment history requirements depended on whether the borrower’s payment was increasing or decreasing following HARP refinance

– Payment history requirements were changed under HARP 2.0—

• no late payment in the past six months, and

• no more than one late payment in the past 12 months

» Late payment: defined as 30-days delinquent

Borrower Benefit Requirement • The lender must make a representation and warranty that the borrower will

receive a benefit from the HARP refinance

• The borrower receives a benefit in the form of at least one of the following:

– a reduction in mortgage principal and interest payment

– moving to a more “stable” mortgage product

– two more borrower benefits added by HARP 2.0:

• a reduction in the interest rate

• a reduction in the loan amortization term

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HARP 1.0

Borrower Benefit Requirement (cont’d)

• Examples of moving to more “stable” product:

– from ARM to a fixed-rate mortgage

– from ARM to a new ARM with longer initial fixed period (must be five (5) years or more)

– from I/O feature to a fully amortizing mortgage

– from 30-year fixed rate mortgage to a fixed-rate mortgage with shorter term (15-, 20-, or 25-year term)

• More Examples:

– extending amortization term, provided it results in a reduced principal and interest payment

– moving from a fixed-rate to an ARM, so long as there is a reduction in the principal and interest payment

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HARP 1.0

Property Eligibility / Occupancy – Eligible properties include:

• 1- to 4-unit principal residences

• 1-unit second homes

• 1- to 4-unit investment properties

– Condos, co-ops, manufactured housing and PUDs are eligible

– Occupancy may have changed by the time of the refinance

– A borrower may be removed from the loan if the remaining borrower made payments from his or her own funds for the past 12 months

Subordinate Financing– All existing subordinate financing must be re-subordinated

– No new subordinate financing is permitted as part of HARP refinance

Employment Verification / Ability to Repay– Verbal verification of employment (VOE) and verification of non-employment

income, if any

– On December 20, 2011, Fannie Mae removed “reasonable ability to repay” requirement

– Certain re-qualification requirements apply if monthly payment increases by more than 20% (discussed infra)

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Fannie Mae and Freddie Mac HARP

Fannie Mae’s HARP• Fannie Mae administers HARP 1.0/2.0 through its “Refi Plus” program

• Two “Refi Plus” options: Refi Plus and Desktop Underwriter (DU) Refi Plus

• Refi Plus

– Manual underwriting

– The lender must be the current servicer on the original loan

• DU Refi Plus

– Automatic underwriting through Desktop Underwriter (DU)

– No current servicer requirement – loan can be refinanced by any participating lender

Freddie Mac’s HARP• Freddie Mac administers HARP 1.0/2.0 through its “Relief Refinance”

program

• Two “Relief Refinance” options:

– Relief Refinance – Same Servicer

– Relief Refinance – Open Access

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Recent Enhancements – “HARP 2.0”

Summary of HARP 2.0 Changes

• Announced on October 24, 2011 by the Federal Housing Finance Agency (FHFA) and became known as “HARP 2.0”

• Expanded eligibility to additional borrowers, including borrowers who are significantly “underwater”

• Recent changes include the following:

– program end date extended until December 31, 2013

– relaxed borrower delinquency requirements

– the maximum LTV ratio “cap” of 125% eliminated for fixed-rate loans with terms up to 30 years

– lenders are relieved of certain representations and warranties

– new appraisal is not required in some situations

– risk-based fees for certain loans have been eliminated or reduced

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HARP Enhancements – “HARP 2.0”

Important Dates

• October 24, 2011—HARP 2.0 changes announced by FHFA

• November 15, 2011—Fannie Mae and Freddie Mac issue preliminary HARP 2.0 guidelines

• December 1, 2011—Unlimited LTV ratios and other HARP 2.0 changes became available under Fannie Mae’s manual underwriting (Refi Plus) option

• Weekend of March 17, 2012—Fannie Mae’s Desktop Underwriter (DU Refi Plus) will be updated to accommodate loans with LTV ratios above 125%

– The removal of the 125% LTV ratio “cap” became effective on December 1, 2011 for Fannie Mae’s manual underwriting option, but will not become effective until mid-March of 2012 for Fannie Mae’s Desktop Underwriter (DU) option

• Actual implementation schedules may vary lender-by-lender

• December 31, 2013—program expiration date

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Implementation of HARP 2.0

Program Extension• Program expiration date extended until December 31, 2013

• Fannie Mae

– note date on or before December 31, 2013

– whole loans purchased no later than April 30, 2014

– MBS pools with issue dates no later than April 1, 2014

• Freddie Mac

– application date on or after December 1, 2011 and a note date on or before December 31, 2013, and

– loans must be delivered through Freddie Mac Selling System no more than 120 days after the note date

Payment History Requirement • The borrower must be current now and must have an acceptable payment

history

• HARP 1.0:

– no late payments in the past 12 months (if payment is increasing)

– no more than 1 late payment in the past 12 months (if payment is decreasing)

• New HARP 2.0 Requirements:

– current on the existing mortgage, and

– no late payments in the past six (6) months, and

– no more than one 30-day delinquency in the past 12 months

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Implementation of HARP 2.0

Elimination of Maximum LTV Ratio• Historical Background

– As originally introduced, HARP imposed a maximum LTV ratio of 105% for all loans

– HARP was revised in July of 2009 to allow a maximum LTV ratio of 125% for fully amortizing fixed-rate mortgages with a term of 30 years

– Nevertheless, many significantly “underwater” borrowers did not qualify under these LTV “cap” limitations

• HARP 2.0 Changes

– Unlimited LTV ratio for fully amortizing FRM with terms up to 30 years

– 105% maximum LTV ratio for fully amortizing FRM with terms greater than 30 years up to 40 years

– 105% maximum LTV ratio for ARMs with initial fixed periods greater than or equal to 5 years and terms up to 40 years

– Examples:

• Borrower refinances into a FRM with a term of 30 years or less no upper limit on the percentage of the home value that can be financed

• Borrower refinances into an ARM may not finance more than 105% of the home value (and the initial fixed period must be 5 years or more)

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Implementation of HARP 2.0

Elimination of Maximum LTV Ratio (cont’d)

• Effective Dates

– For Fannie Mae’s manual underwriting (Refi Plus) option: available for applications dated on or after December 1, 2011

– Not yet available for Fannie Mae’s Desktop Underwriter (DU Refi Plus)

• Expected in mid March, 2012

• DU Refi Plus continues to apply maximum LTV of 125% until March 2012

• Until Match 2012, lenders may offer HARP for loans with LTV ratios above 125% only through the manual underwriting option and must be the current servicer of the loan being refinanced

– Freddie Mac:

• “Relief Refinance – Same Servicer” option: effective for loans with Freddie Mac settlement dates on or after February 1, 2012

• “Relief Refinance – Open Access” option: for loans with the settlement dates on or after March 15, 2012

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Implementation of HARP 2.0

Revised Representations and Warranties

• HARP 2.0 waived some of the underwriting representations and warranties that lenders make when they refinance loans under Fannie Mae’s manual underwriting option (Refi Plus)

• On the Original Loan – the lender is only responsible for the following representations and warranties:

– Compliance with laws• the original loan was originated in compliance with laws (federal, state and local)• E.g.: fair lending, ECOA, TILA, RESPA, predatory lending

– Fraud • the original loan did not involve any scheme or pattern of fraud• “Fraud” means a misstatement, misrepresentation or omission that cannot be

corrected and that was relied upon by Fannie Mae. “Scheme or pattern of fraud” is defined as any fraud involving 2 or more mortgages and 2 or more perpetrators acting in common effort.

– Original project eligibility• for condos, co-ops and PUDs, the project was approved when loan was originated

• The lender is not required make other reps and warranties related to borrower eligibility or underwriting applicable to the original loan

– However, mortgage payment history requirements apply (described above)

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Implementation of HARP 2.0

Revised Representations and Warranties (cont’d)

• These HARP 2.0 changes apply to Fannie Mae’s manual underwriting option (Refi Plus)

• For Fannie Mae’s Desktop Underwriter option (DU Refi Plus) – no changes from HARP 1.0

– the lender is not responsible for any reps and warranties on the original loan– the lender is relieved of the standard underwriting representations and

warranties on the new loan if:• all data in the loan casefile is complete, accurate and not fraudulent• the lender follows the instructions in the DU regarding income,

employment, asset, and fieldwork documentation• the lender complies with all other requirements in the Selling Guide

• Effective Dates: – Fannie Mae “Refi Plus”: applications dated on or after December 1, 2011– Freddie Mac “Relief Refinance – Same Servicer”: similar changes are

effective for loans with applications dated on or after December 1, 2011 and Freddie Mac settlement dates on or after January 3, 2012

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Implementation of HARP 2.0

Property Valuation Requirements

• HARP 2.0 expanded the use of AVMs – removed the need for a new appraisal in some cases

• A new appraisal is not required if there is a reliable AVM provided by the GSE

• For Fannie Mae’s Desktop Underwriter (DU Refi Plus)

– Increased use of the Property Fieldwork Waiver

– Fannie Mae waives the appraisal and accepts the property value estimate

– The lender is relieved of reps and warranties as to value, marketability or condition of the property

• Fannie Mae’s manual underwriting (Refi Plus) – two options:

– (A) represent and warrant that the current value of the property is not less than the value as reflected in the original appraisal

• assess current market value based on any “acceptable” means

– or (B) obtain a new appraisal

• must obtain new appraisal if cannot make rep and warranty

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Implementation of HARP 2.0

Elimination of Risk-Based Fees• HARP 2.0 eliminated risk-based pricing for short-term loans and reduced

risk-based fees for other loans

• Delivery fees—Loan Level Price Adjustments (LLPAs) and Adverse Market Delivery Charges (AMDC):

– eliminated for HARP loans with amortization terms of 20 years or less

– reduced to .75% for HARP loans with amortization terms more than 20 years

Bankruptcy and Foreclosure• Revised bankruptcy and foreclosure policy under Fannie Mae’s manual

underwriting (Refi Plus) option

– Removed requirement that the borrower (on the new loan) meet the standard waiting period after bankruptcy or foreclosure

– Removed requirement that the original loan must have met the bankruptcy and foreclosure requirements in effect at the time the loan was originated

– Previously, lenders were required to follow the Selling Guide with respect to bankruptcy and foreclosure

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Implementation of HARP 2.0

Borrower Re-Qualification • Borrowers must be re-qualified for the new loan if there is a “large payment

increase” – if payment goes up by more than 20%

– The borrower’s debt-to-income (DTI) ratio may not exceed 45%

– The borrower must have a minimum credit score of 620

– The lender must verify all the borrower’s income sources and amounts

– The lender must verify assets to close if the borrower is required to bring funds to closing

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Implementation of HARP 2.0

Borrower Solicitation

• Lenders may solicit borrowers for HARP – subject to requirements

• Must simultaneously apply the same advertising and solicitation activities to all borrowers with loans owned or securitized by either GSE

• Must apply the same advertising and solicitation activities to all loans regardless of whether the lender or a third-party owns the pool

• If solicitation materials refer to a GSE, must include the following language:

“Freddie Mae and Fannie Mae have adopted changes to the Home Affordable Refinance Program (HARP) and you may be eligible to take advantage of these changes.”

“If your mortgage is owned or guaranteed by either Freddie Mac or Fannie Mae, you may be eligible to refinance your mortgage under the enhanced and expanded provisions of HARP.”

“You can determine whether your mortgage is owned by either Freddie Mac or Fannie Mae by checking the following Web sites:

• For Freddie Mac: http://www.freddiemac.com/mymortgage or • For Fannie Mae: http://www.fanniemae.com/loanlookup/.”

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Beyond HARP 2.0

Broad Based Plan to Help Responsible Borrowers • Announced by the President during State of the Union on January 24, 2012

• Includes a plan to refinance non-GSE loans through FHA

• Also includes additional enhancements to HARP

Refinancing for Non-GSE Borrowers • Proposal to refinance non-GSE loans through the FHA

• Estimated to save homeowners average of $3,000 per year

• Proposed Eligibility Requirements:

– loans secured by single family, owner-occupied principal residences

– the borrower must be current for the past 6 months with no more than one late payment in the past 6 months

– minimum 580 FICO score

– no jumbo loans—the loan may not exceed FHA conforming loan limit

• Streamlined application process:

– no new appraisal or tax return

– lenders must confirm employment

• Possibility of required principal write downs for deeply “underwater” borrowers (140% or more LTV)

• Estimated cost of $5 to $10 billion to be paid by “Financial Crisis Responsibility Fee” imposed on the largest financial institutions

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Beyond HARP 2.0

Additional Enhancements to HARP – “HARP 3.0” ?

• Proposal to further simplify HARP for GSE loans – could amount to HARP 3.0

• Proposed Additional Enhancements to HARP:

– further eliminate the need for a new appraisal by using mark-to-market accounting or other alternatives to appraisal

– apply the same underwriting procedures for refinancing by new servicers and current servicers

– extend HARP streamlined refinance to low LTV borrowers (LTVs below 80%)

Payment of Closing Costs

• Proposal to require GSEs and FHA to pay borrower’s closing costs if the borrower chooses to refinance into a shorter-term loan of 20 years or less

• Encourages re-building equity in borrower’s home

Congressional Approval • Some or all parts of the President’s refinance plan may require Congressional

approval

• President Obama is calling on Congress to pass legislation for the new refinance plan

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Jim MilanoFed Kamensky

Weiner Brodsky Sidman Kider PCWashington, D.C.www.wbsk.com

Milano@wbsk.comKamensky@wbsk.com

202 628 2000

Questions