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Home Affordable Refinance Program: A lifeline to 'underwater' borrowers?

Home Affordable Refinance Program did not reach as many borrowers as officials had hoped. By including 'underwater' loans, the Obama administration hopes to stem the tide of foreclosures.

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One key feature is Fannie and Freddie will assume all the risk for loans that go into default except for those involving fraud. Recently, Fannie and Freddie have been forcing banks to take back mortgages.

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“There is way too little competition and incentive to compete, to help families refinance, and one of the reasons is because lenders fear the mortgage may be coming back to them,” said Donovan.

How much the adjusted program would cost the US government is unknown, but if borrowers default on the refinanced loans, the taxpayers will absorb the loss.

Housing experts say, however, that they view the changes as generally positive.

“I am not sure this isn’t more an incremental step than a leap forward,” says John Taylor, the president of the National Community Reinvestment Coalition, a lobbying group in Washington. “But, it will be helpful.”

Mr. Taylor suggests the administration look at the revised HARP in three months to see if more changes will be needed. “We cannot afford another year of 1.5 million to 2 million more foreclosures,” he says.

Taylor says if the changed HARP does not allow more people to refinance, he thinks Fannie Mae and Freddie may have to eliminate even more fees, which would further lower the cost of loans. “They should stop trying to make money on this deal,” he says.

In addition, he suggests FHFA expand its pool of eligible homeowners to include those whose payments are on-time 75 percent of the time.

“You then go from a potential pool of 1 million people to a potential pool of 4 million people,” he says. “Many of those people would benefit from a lower interest rate mortgage.”

The changes will not affect people whose loan-to-value ratio is under 80 percent – in other words people who have more than 20 percent equity in their homes. However, Mr. Donovan said the administration would try to get them included as well.

For households under the 80 percent level, refinancing at today’s rates, without the fees and appraisals, could result in a savings of $2,500 a year, calculated Donovan. “That is the equivalent of a significant tax cut,” he said.

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