HARPing on refi reform

President Obama is stumping for changes to the HARP program -- and while I try to stay politically neutral here, I reserve the right to call out idiocy anywhere I see it. (and yes, idiocy may be a stronger word than is called for - but wasting political capital slightly modifying a program that is very weak and doesn't address some fundamental issues, is not exactly smart)

http://www.marketwatch.com/story/mortgage-refi-plan-targets-hard-hit-borrowers-2011-10-24?siteid=nwhpf

"To spark interest in HARP, the program will lower fees, eliminate the current 125% loan-to-value ceiling, waive lender warranties and eliminate the need for property appraisals. "

Gee, make it easier for bad credit risks to refinance? Here's my take.

Yes, something needs to be done. But allowing people who fundamentally are screwed *anyway* to get out of their loans (which includes forgiveness of some principal) shifts the burden unfairly to the bank-stock shareholders. If you are underwater on a mortgage, it is not necessarily an emergency. Absent plans to move, all it takes is some time to change the situation. The wholesale granting of "liar's loans" a few years ago was obviously a stupid things for banks to do; I am NOT excusing them. But folks who enter a mortgage need to realize that a secured loan is exactly that - and the house IS the security. You pledge to pay $250,000, and fail to pay it back - you don't get to keep the house. No one questions the repossession of a car after failing to pay a $20,000 car loan!

So it is all well and good to question this kind of program - but what do I propose instead?

First, only allowing a program that is guaranteed by FreddieMac or FannieMae does not help the 70% of homeowners who have a mortgage through another institution. Secondly, principal should not be forgiven. Third, credit issues still need to be resolved. Here's my proposal.

Allow a two-year period where refinances can be done with the following waivers:

* Any amount can be refinanced, up to the current loan amount.
This only makes sense. If the bank is on the hook for $400,000, then they by definition cannot be hurt by allowing a refinance of $400,000. By allowing the refi, they increase their chances of getting repaid AND make more in interest charges the next few years!

* Modify the appraisal process.
This is basically a correlary of the above point. We don't care about what the home is worth; we just want to make sure it is structurally sound.

* Credit still needs to be checked. Income verification needs to be revamped.
We do want to make sure that the loans made can still be repaid. If a household is bringing in $5,000 a month, is there any doubt that a $2,000 payment - 40% of their income!! - might be a stretch, still? If their P&I payment was $2,800 a month but an extra member of the household used to be working, their situation has changed enough that perhaps they shouldn't be owning a house anymore.

I guess I am angry that only a small percentage of homeowners may qualify under HARP and that the fix hurts shareholders who have already been nailed by the last few years of bank stocks' crumbling share prices.

Regards,
Trond Hildahl