Tuesday, August 11, 2009

My Two Cents on Why HARP and HAMP are Not Terribly Successful

Now that my credit is on the mend (or partially on the mend, still waiting on the outcome of the re-investigation to delete the bogus item) I've started doing more research on HARP, Home Affordability Refinance Program. It allows underwater home owners who purchased before January 2009 to refinance up to 125% of the home value. I am finding out that it may not be worth the effort.

Getting down to the nitty-gritty of the numbers, we have a balance of about 404,000 on the 1st mortgage. And really, that's all that matters because, guess what? My research indicates that there is no consolidation of 1st and 2nd mortgages into one loan under HARP. Only the first lien is eligible. We are stuck with our shitty 2nd mortgage which carries a rate of 8.375% (and we still owe 44 of the 48K). This is the real thorn in my side, not the first mortgage. Looking at the first, I'm well within the the 125% limit - taking Zillow's estimate, 404,000/420,500 is 96% (technically my first mortgage is not underwater).

The rate on this mortgage is 5.75% and we are more than 2 years into the payments. The remaining interest to be paid on this loan is a whopping $405,873. Yeah, ridiculous. If you look at the interest you pay over the life of a 30-year loan it's likely almost as much as the initial home price. We've paid $53,187 in interest, to date. As of today, we'd be lucky to get 5.375% with no points. We would be unlikely to get 5.25% with no points but let's consider this long-shot just for argument's sake.

Total interest on principal of$404,000, 30 years@5.375% = $410,420.

A rate of 5.375% without the option of consolidating the second mortgage is pointless. I will pay more in the end.

Total interest on principal of $404,000, 30 years@5.25% = $399,124.

That looks better, however, closing costs are $2,000, minimum. So we are talking maybe $3,000 of savings (though it'll take 2 years longer to be paid in full so some savings are lost to opportunity cost). This is if this imaginary 5.25% with $2,000 closing costs exists. If I'm held to my existing loan servicer, it doesn't. The 30-year fixed rate posted on their site today is 5.375% with 1 point. Even paying a point for 5.25% ($4,000) nixes any savings from the rate.

It is looking like HARP is completely useless to me.

What about HAMP? I know these names are ridiculous. Looks like hammy or something. Anyway. Home Affordability Modification Program. I have read that unemployment benefits are included when they consider the borrower's income. This would land us in between 31% and 38% of payment to gross monthly income ratio, which is not that bad. Banks are only required to get the borrower down to 38%, and then are given additional incentives to get down to the magic, happy number of 31%. Even if we assume that we would qualify for a modification, we would get whacked on our credit. During the trial period, the bank will report the portion that was "modified" as delinquent. I'm not sure if it goes away after the trial period, my guess is it doesn't and the standard 7-year expiration policy applies.

Given all this, I am beginning to think that it's a waste of time for me unless the program is expanded to cover second mortgages. If I had some crappy rate on my 1st mortgage or an ARM it would make sense. If HARP covered consolidation of 1st and 2nd, it would make sense. My guess is this is why many people have not refinanced under the program. The parameters are rather narrow - you can't have PMI (which, if you didn't put 20% down, you likely have it or you have a second mortgage), and it doesn't cover the second. And the second is usually the one with the crappy, high rate. And if you have the crappy rate or ARM on the 1st mortgage, it may be likely you aren't current on your loan because your credit wasn't good enough to get you the better rate in the first place. Rates have been under 7% since 2002 - so considering the pool of people that are underwater and have rates of 6.5% or higher - I would bet many of these people are not current on their payments.

In my non-professional, monetary soap-box opinion, in order for this program to truly be successful, it has to take into account second mortgages and first mortgages with PMI.

Feh.

5 comments:

  1. Oh my God woman, that was too much calculating and too many numbers. LOL You just made me want to sell and rent forever!

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  2. Yeah,a rich old man told me in my cab one night .." I own nothing " therefore noone can ever know me..He lived in one of the best buildings in NYC , and I always think he's right.

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  3. You are way good at dissecting things! Very admirable!

    I wanted to refinance our house to a 15 year note with a lower interest rate and they wouldn't touch it because of the second note. Now I don't think the appraisal would be enough to refinance.

    It's like a rubix cube. I never figured those out either.

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  4. I agree, my scenario is exactly the same as yours. If my lender would roll my second into the HARP refi I could save $700 a month. Now that would help my family. Please let us know if you found another route. I did go a a major lender and they told me if my mortgage was with them they could roll them together, get me pre-approved in 30 min and close this mess in 20 days. The circumstances of my second made a difference because it was part of the original purchase and not taken out after the first was made. Still trying to figure out a solution......Frustrated in Texas

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