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December 20, 2012
No Strings Attached: HARP 2.0
Before you read this entry, I would ask that you take a few minutes and read my prior blog from Nov. 6th and the most recent news article I've posted on our site. Once you've had a chance to do that, come back here and read 'the rest of the story'.

I promised to follow up once my refinance was either approved or rejected: Earlier this month, I signed the closing papers on my new loan. Everything was as I described in my earlier post; there were no costs to me, the rate quoted was the rate I got, and my monthly payments were reduced by roughly $135. What I still don't understand is how I qualified for the loan.

You'll remember my skepticism when I learned that the HARP 2.0 program put a minimum loan-to-value of 80% on all qualifying mortgages. With that knowledge, I figured there was absolutely no way my loan would be approved. In fact, the value assigned to my house (in the closing papers) resulted in a loan-to-value of less than 50%. Even now, I have no idea why or how this loan was approved, as theoretically it helped someone (me) who didn't necessarily need the help.

In speaking with my business partner Matt last week, he shed a little light on the situation which didn't necessarily answer my eligibility questions, but did make it very clear why the banks are 'expanding' the program to seemingly ineligible borrowers.

Matt speculated that CitiMortgage (my former and current lender) will sell my new loan to Fannie Mae (or Freddie Mac) for somewhere between 106% and 108%. Yes, you read that correctly. Fannie will pay far more than they will ever collect in principal from me. Why? Because their cost of money is so low that the interest rate spread they can earn over the life of my loan justifies (to them) the higher price.

So...calling back to my first post on this subject, Citi stood to not only be reimbursed for all the closing costs, but would also make a profit in the vicinity of $10K-$14K off my loan. Faced with that kind of profit potential, why wouldn't Citi seek to refinance (through HARP) every single loan they carry on their books?

I predict we are going to see an absolute BOOM in refinancing until the end of 2013, when HARP 2.0 expires. Of course, should the economy need that 'boost' (false as it may be), the program could very well be extended. From a taxpayer's standpoint (since government-sponsored enterprises are buying all these loans), the one benefit is that older, higher rate bonds will be paid off (in theory) and replaced by lower rate bonds. Of course, it's just debt (mine) paying against debt (the government's). Nothing new has been produced...it's just recycling debt at a lower rate.

Thankfully, my debt is a lot less than the government's. Oh wait, where does the government get its money from again? Silly me...

From my family to yours, have an absolutely wonderful, memory-filled, and MERRY Christmas!

Clint



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