Real Estate Matters | ‘Credit enhancement’ complicating HARP refi

October 21, 2013

(Andrew Harrer/BLOOMBERG) Check with Fannie Mae about your eligibility to refinance your underwater mortgage.

I currently have a mortgage with my credit union, and when trying to refinance (using HARP) through another lender, I was told I didn’t qualify.

 It appears that my current loan has a “credit enhancement,” thus making me ineligible to use HARP. I haven’t missed a payment or paid late and have a credit score above 780, but I am underwater on my loan.

 I contacted my credit union to get further information and I was told that my loan had a zero down payment. I was also told that Fannie Mae, the holder of my loan, would have to change their policy to allow my eligibility. This is also known as LPMI. What should I do?

Well, getting a zero down payment loan probably seemed like a great move when you got your loan. In fact, it may have been the right move for you at that time. When you obtained the loan, you probably received a very favorable interest rate and you didn’t end up paying mortgage insurance on your loan. It seemed like a win!

Most borrowers that didn’t have a 20 percent cash down payment purchased their homes using two loans or one loan with private mortgage insurance. In the boom years of the real estate market, a borrower would obtain a first mortgage of 80 percent of the purchase price of the home and an equity loan for up to the balance of the purchase price. While the second mortgage interest rate was higher than the primary mortgage, using two mortgages tended to be cheaper than having one mortgage and having to pay mortgage insurance.

Mortgage insurance benefits the borrower only in that it allows that borrower to obtain a mortgage. The true benefit of mortgage insurance is to protect the lender in case the borrower fails to make payment on the loan and the lender has a loss. Given the precipitous drop in real estate prices in some areas of the country, mortgage insurance companies have had to pay billions to the mortgage lenders for their losses. Many of these companies have gone out of business.

There were several mortgage insurance programs available when you bought your home. With one, the borrower paid the insurance premium on a monthly basis until the loan balance was less than 80 percent of the original loan’s value. In another version, the interest rate on the loan might be higher and the lender paid the mortgage insurance premium.

In your particular case, the insurance premium wasn’t paid by you and seems to have been paid by your lender. As is often the case, there are unintended consequences to your actions and now you’re bootstrapped by your loan.

Your lender probably didn’t tell you, but in a traditional refinance of a home mortgage, the old lender is paid off in full and the new lender furnishes that new loan on your property. Unfortunately, you are underwater — your home’s value is less than what you owe on your loan. If you refinanced your home, there would be no way for you to pay off the existing lender. If the existing lender were to agree to take a loss, that lender would want to have the mortgage insurance company covering your loan to pay up. If the mortgage insurance company doesn’t have to pay up, then the lender holding your mortgage isn’t willing to take the loss on your loan with a refinancing.

In researching your issue, we came across a Fannie Mae announcement from last year updating the eligibility requirements for loans with certain types of credit enhancements. It is possible that your loan with its credit enhancement may qualify under these refinance guidelines, even within the Home Affordable Refinance Program (HARP).

Here are some steps to follow:

1. Confirm that your loan is held by Fannie Mae by searching your property address on their site at www.KnowYourOptions.com.

2. Research published guidelines by calling 1-800-7FANNIE and looking at the www.FannieMae.com Web site.

3. Finally, if you confirm that your particular loan and your specific circumstances limit your ability to use HARP to obtain a new loan, you might have to wait until Fannie Mae changes its requirements to include people like you in a future refinance.

Having said all that, you need to evaluate how a refinance would help. While lowering your interest rate should help, if your property is way underwater, lowering your interest rate will not change the amount you still owe on the property. Instead, it might lower your payment but at the same time extend the length of your current loan term. Ideally, you’d be able to lower your interest rate, lower your payments, and shorten your loan term all at once.

With HARP, you can shop around to see what different lenders are offering. We’d encourage you to talk to a different lender and research this issue further with that other lender.

However, we’d caution you not to have each or any new lender pull a copy of your credit report each time you talk to a lender. Don’t give them your Social Security number until you’re pretty certain you’ve found a lender that can work with you on your refinancing.

You have a great credit score and it appears that you have managed your credit well. The question you have to ask yourself is what is your ultimate goal in refinancing? If you’re planning to stay in the home for years to come and simply want to reduce the interest rate on your loan, you can go ahead and refinance. If you plan to stay in the home for a short period of time, you might consider selling the home now while lenders are geared to allow short sales.

Once you have approval from the lender on the short sale, you could decide whether you need the lender to waive the balance owed or agree to repay that balance over time. Any decision you make will affect your credit history and score, particularly if you decide to have the lender waive the requirement to have you repay the loan.

Good luck, and let us know how it all turns out.

Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a.m. to 1 p.m. EST. Contact Ilyce through her website, www.thinkglink.com.

 

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