Homeowners will soon be able to refinance their mortgages, no matter how far underwater they are, under new guidelines to the Home Affordable Refinance Program (HARP) announced today.

The new rules, which likely will take effect early next year, eliminate the 125 percent loan-to-value limit on refinancing mortgages through HARP, making borrowers eligible to refinance no matter how far the value of their home has fallen.

Some fees to be eliminated or reduced

In addition, certain fees will be eliminated for borrowers who refinance into shorter-term loans and other fees will be lowered for other borrowers. The new guidelines were announced today by the Federal Housing Finance Agency (FHFA), the parent agency of Fannie Mae and Freddie Mac.

HARP is a government-backed mortgage refinance program available only to borrowers who have mortgages owned or guaranteed by Fannie Mae or Freddie Mac. That is not changing.

"This new phase of the Home Affordable Refinance Program (HARP) will help reach more borrowers with negative equity so they can refinance into new Freddie Mac mortgages at today's historically low-rates," said Charles "Ed" Haldeman Jr., Freddie Mac CEO. "These changes mark another step on the road to recovery for the nation's housing market and underscore Freddie Mac's vital role in making affordable mortgage financing available to America's homeowners and future homebuyers."

Less risk for lenders

Other significant changes include exempting lenders who refinance mortgages from liability if the mortgages they assume turn out to be flawed in certain ways. By waiving certain representations and warrants, as they are known, the new rules make it safer for lenders to refinance mortgages originated by other lenders, thereby making it easier for borrowers to shop around for the lowest rate.

The new guidelines also eliminate the need for a new appraisal in many situations, and extend the HARP program through Dec. 31, 2013. It was originally scheduled to expire in mid-2012.

Effect on interest rates unclear

One thing that is not clear is whether the new rules will address loan-level price adjustments, which are additional fees charged for mortgages that are regarded as high-risk. Since underwater mortgages are regarded as inherently risky, such fees can raise the interest rate on a potential HARP refinance to the point where it is no longer attractive to the borrower.

It's also not clear whether lenders will embrace the new program or not. Participation in HARP is voluntary for lenders, who make the final decision as to which loans they will refinance or not. Lender misgivings about certain aspects of the current HARP, such as the representations and warranties issue, have been an issue in restricting the number of loans refinanced under the program and it remains to be seen whether the new changes will be more to their liking.

Published on November 15, 2007