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Underwater-300x300Refinancing help for underwater California homeowners whose loan is not backed by Fannie Mae or Freddie Mac may soon become a reality. Unofficially billed as HARP-3, it is one of the top priorities of Obama government.

Obama government is considering expanding the Home Affordable Refinance Program (HARP) to include homeowners who are underwater but whose mortgage is not backed by government sponsored enterprise (GSE) namely, Fannie Mae and Freddie Mac.

According to Core Logic, at the end of June 2012, about 22% of all homes or around 10.8 million homes were underwater meaning the mortgage owed on the house was more than the market value. According to analysts at Barclays Capital and J.P. Morgan Chase Co. about 900,000 underwater borrowers are current on their mortgages and their loans are not backed by GSEs. If the HARP program is expanded these borrowers can benefit from refinancing into current lower mortgage rates.

Get on the HARP-3 anticipation list for CA, OR and WA homeowners

Several obstacles remain for HARP-3 approval:

Banks would demand immunity from buy-backs: Even on a government backed loan, its the banks who fund the loan to the borrowers. Banks would demand immunity from having to buy back any loans they refinance that later defaults. Such a shield would increase the risk for GSEs.

Fannie/Freddie need to figure out pricing: Under HARP-3 approval proposal, Fannie and Freddie would be allowed to charge higher rates/fees in order to compensate for the risk for backing underwater mortgages. Its not going to be easy for them to price such loans since they have no prior experience with such kind of borrowers.

Need backing of Congress and firms’ regulator: The expansion of HARP program would transfer billions of dollars of underwater mortgages to government backed Fannie Mae and Freddie mac . Hence it would require congressional approval to temporarily change their charter. Also their regulator Federal Housing Finance Agency (FHFA) needs to approve this. The FHFA earlier this year had rejected Obama administration’s proposal to write down the principal on such mortgages. But they seem to be more amenable to this new proposal.

I will be sure to keep you updated on the progress of expanded HARP aka HARP3.

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