Homeowners can start applying to refinance their underwater mortgages under new HARP guidelines as soon as Dec. 1, according to new program rules released late yesterday.

The new rules also reduce up-front costs for borrowers refinancing underwater mortgages and make it easier to refinance if a borrower has previously gone through foreclosure or a bankruptcy.

Of course the biggest change is that homeowners will now be allowed to refinance Fannie Mae- or Freddie Mac-backed mortgages no matter how much their homes have fallen in value. It was previously announced that a current limit restricting refinanced mortgages to no more than 125 percent of the current property value is being eliminated.

Targeted at underwater borrowers

HARP, which stands for Home Affordable Refinance Program, is a government initiative designed to enable borrowers with little or no equity in their homes to refinance their mortgages at lower rates. With 30-year mortgages now averaging around 4.0 percent, according to Freddie Mac, borrowers are currently seeing the lowest mortgage rates in at least 60 years.

According to lender's guidelines released Tuesday by Fannie Mae and Freddie Mac, the new rules apply to applications to refinance mortgages submitted on or after Dec. 1, 2011, and through Dec. 31, 2013, when the program expires.

Upfront fees waived for 15-, 20-year fixed-rate mortgages

The maximum loan-level price adjustment - an upfront fee charged on low-equity mortgage - is being reduced to 0.75 percent of the loan amount from 2.0 percent currently. The fee is being eliminated for loan refinanced into fixed-rate mortgages with terms of 20 years or less.

In addition, the standard waiting period for re-establishment of credit following bankruptcy or foreclosure is being eliminated.

Lender guidelines, timetables may vary

Individual lenders will vary as to their own schedules as to when they will start to accept refinance applications under the new guidelines, and some will likely not participate. Others may implement their own, stricter guidelines than those allowed under the program - for example, some may still set limits on how far a borrower can be underwater and still be approved for a refinance, though Fannie Mae and Freddie Mac now have no such limits themselves.

Certain guidelines that offer refinancing lenders protection against liability for problems arising from the original mortgage will not take effect until March 2012, which could slow the pace of approvals over first few months the new guidelines are in effect.

However, borrowers will not be restricted as to which lender they can refinance with, so it seems likely that participating lenders will soon begin advertising to draw away other lender's clients.

PMI issues remain unsettled

Another potential problem has to do with Private Mortgage Insurance (PMI), which is paid by borrowers who initially made down payments of less than 20 percent of their loan amount. While most insurers have indicated they will allow mortgage insurance to be transferred to a new mortgage following a HARP refinance, one of the major ones is reported to be refusing to go along.

Bloomberg News reports that American International Group (AIG) is telling mortgage lenders it won't allow mortgage insurance to be simply transferred to the new loans created by refinancing. It cites an AIG spokesman as expressing concerns lenders could use the program to evade responsibility for poor decisions made in issuing the original mortgages.

AIG's stance is particularly surprising given that the company is primarily owned by the Treasury Department, a consequence of the financial bailout that followed the company's 2008 liquidity crisis.

The HARP program is limited to mortgages backed by Fannie Mae or Freddie Mac. Loans must have been originated prior to June 1, 2009. To qualify, borrowers must be current on their mortgage payments with no delinquencies over the previous six months and no more than one during the rest of the previous year.

Published on November 16, 2011