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November 06, 2012
The Lovely Sounds of HARP
Last week I was contacted by a Loan Officer with my existing mortgage company. To summarize, he was offering a no-cost refinance at an interest rate 1.625% below my existing rate. "No cost?" I asked. "No cost", he replied. "Hmmm...what's the catch?"

The Home Affordable Refinance Program (HARP) is the government's solution to underwater mortgages. If your mortgage is owned by Fannie Mae or Freddie Mac and you've made your last twelve payments on-time, you too may qualify for a no-cost refinance. In fact, it is expected that HARP will close 1,000,000 refinanced loans in 2012.

The process to apply was painless - no forms to complete, no verification of any kind, etc. I received an email from the Loan Officer over the weekend informing he had submitted everything for approval, and now we just wait. OK, great.

But....being the cynical person I am, I wondered WHY my lender would call up out of the blue and offer to refinance me at no cost, and get approximately $135/month LESS from me than they do currently based on the interest rate differential. Well, funny I should ask...

It turns out the banks' closing costs are reimbursed by the government. Since the loan is going to be sold to Fannie or Freddie anyway, what does the bank care whether I'm paying interest at 5% or 3%? They only recognize the opportunity to collect fees from the government in exchange for replacing my current mortgage with a LESS VALUABLE asset to the GSEs (Government Sponsored Enterprises Fannie & Freddie).

Here's the rub: I doubt my application will be approved. Not because my stated income (which is my actual income, by the way) isn't sufficient. Not because my pay history isn't perfect (it is). The reason? I'm not underwater on my mortgage. Not even close. In fact, I only owe about 50% of what my house is worth. According to HARP guidelines, if I don't owe 80% or more of what my house is worth vs. its value (aka Loan To Value or LTV), I'm not eligible.

So...if the loan actually goes through, it means the banks have figured out a way to show the value of my house is much less than it actually is, all to collect some fees from the government. I really won't be surprised if they are able to do that...after all, no appraisal is required, so what are they basing the value on?

If my refinance isn't approved, once again I will feel like the idiot taxpayer that always gets stuck with the tab because he did everything he was supposed to do. Like buying a house I could afford in the first place. Like paying my mortgage every month. Like putting down a 20% cash down payment when I bought my house. Like not buying into the lie that real estate always appreciates and he who dies with the most toys wins.

I see this as just another way banks profit from the inefficiency (or rather, stupidity) of the government. I will be interested to see if the loan goes through, and will gladly share the outcome in a future blog.

Make it a great week!

Clint


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