March 26, 2012

Lender Perspective On HARP 2 Loan Approvals & Rates

March 26, 2012

Lender Perspective On HARP 2 Loan Approvals & Rates

Here are two important stats on HARP 2 refi loans for underwater homeowners:

-In terms of individual customers, overall universe of HARP 2 loans is approximately 2.1 million loans

-Of this universe of HARP 2 loans, less than 5% of all loans have a loan-to-value (LTV) ratio greater than 125%

And here are opinions from analysts at the loan servicer (aka bank) with the highest percentage of HARP eligible loans:

-There is an 80% chance that loans with a LTV of 125% or greater will be a strategic default (meaning owners will walk away at some point)

-Customers who have shown an “on time” payment record for the past 24 months, with an LTV of 125% or less, have a 90% chance of continuing to make their mortgage payment.

This is the kind of information banks use make decisions on how to structure their HARP 2 approval rules. The HARP 2 qualifying guidelines are one thing, but banks can choose to be more conservative and they review information like this to make those decisions.

For example, they can use stats/opinions like those above to decide that they will in fact cap the LTV ratio limit even though HARP 2 doesn’t require that. Or they might choose not to lend on condos even though HARP 2 allows condos.

As with all loan guidelines, lenders follow core Fannie and Freddie guidelines to make sure their loans can be sold, but lenders can and do “overlay” additional approval guidelines and/or rate adjustments to control risk.

So HARP 2 consumers can’t assume that they’re all set if they meet core HARP 2 guidelines. They must meet the guidelines of the lender who will be making the loan.

Also, my writing partners Dick Lepre and Rob Chrisman have both made good points since yesterday on this topic.

Here’s Dick on HARP 2 approval guidelines in Sunday’s San Francisco Chronicle:

Harp 2 “minimizes the reps and warranties we have to make, thus reducing the possibility of buyback of these loans,” says Dick Lepre, a senior loan officer with RPM Mortgage.

But it doesn’t relieve all of them. And even if it did, originators – who often continue to service loans they sell to Fannie or Freddie – don’t want all the headaches associated with servicing defaulted loans. That’s why some lenders are still imposing loan-to-value limits and other requirements.

RPM, for example, will not go above 125 percent loan-to-value on Harp 2 loans. “Once they get above 125 percent, the threat of strategic default goes up dramatically,” Lepre says.

And here’s Rob on HARP 2 pricing this morning:

Why would anyone pay the same price for a 150% LTV 4.25% loan as they would for a 60% LTV 4.25% loan? Remember that both Fannie and Freddie have been buying mortgages with LTV’s greater than 125% through their cash windows since February, but MBS pools backed by these will be issued starting in June. A starting point that some investors are using in pricing this new product is looking at HARP 1.0 pool pricing, backed by mortgages with 105%This price difference can equate to .75% or more in rate difference.