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Program Progress

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Posted On: 08/12/2009

Q: Several months ago the government announced the start of a $75 billion program to halt foreclosures. How is it working?

A: In March the Obama Administration announced that it would try to ease the foreclosure crisis with the Home Affordable Refinance Program or HARP. The program had two components: A loan refinancing plan for borrowers who are current but cannot refinance because the value of their home has dropped and a loan modification program for distressed owners who are facing foreclosure.

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In mid-June we asked Treasury Department spokesperson Meg Reilly for an update and she said roughly 200,000 homeowners had enrolled in the program. This is a huge number. In comparison, HUD reported that 945 borrowers had applied for help under the Hope for Homeowners program as of May 31 while just one loan had been approved. Roughly 4,100 delinquent conventional mortgages were refinanced under the FHASecure program, which had been announced by President Bush in August 2007.

Despite the big number some caution is in order. First, the program was announced in March, it takes time to gear up, and there’s a three-month trial period for modifications before new loan arrangements become permanent. The result is that in July we will only have the earliest possible results from the program. Second, HARP does not exist in a vacuum. If distressed homeowners can get lower rates and better terms that’s great, but they still have to make their monthly mortgage payments. Given rising unemployment levels and the widespread lack of savings even people in the program who have completed the three-month trial period could still re-default.

It will probably take until September or October before we fully understand how well the HARP effort is working. In the meantime, if you’re having mortgage problems don’t wait. Contact your lender, your state housing office and look at MakingHomeAffordable.gov.

Q: Can a lender forbid a homeowner from refinancing his mortgage loan or require that the homeowner must stay in the house for a year before the homeowner can refinance? Can a lender forbid the homeowner from paying off his loan at any time during the mortgage term? Can lenders charge a penalty for an early loan payoff? Where can we find the federal rules that protect real-estate consumers?

A: A mortgage is a contract between a lender and a borrower. It is typically made in the “lender’s usual form,” meaning that the lender gets to set the rules of the agreement. As a borrower you do not have to accept the lender’s offer – you can turn down the loan.

When you borrow money for a house the lender wants to be assured that you intend to physically occupy the property as your prime residence. Seen the other way, the lender wants to make sure you’re not an investor, a borrower who represents more risk to the lender. Investors often pay a somewhat higher rate and face a somewhat tougher underwriting process.

How can a lender know that you’re really an owner-occupant and not a secret investor trying to finance with a cheap residential loan? By getting a statement from you which says you intend to occupy the property within 30 days of closing and that you expect to remain in the property for at least a year.

How can the lender enforce this provision of the loan application? By calling the loan if you quickly rent the property or fail to move in. How will the lender know if you’re not occupying the property? By checking the property’s insurance coverage, the location from which loan payments are sent, etc.

A lender cannot prevent you from prepaying a mortgage – but a loan agreement can stick you with stiff prepayment penalties. In some jurisdictions prepayment penalties are forbidden but mortgages made by federally-regulated lenders face no such prohibition. Federal rules generally take precedence over state laws, a process called “pre-emption.”

There are few federal rules that directly protect borrowers. If there was serious regulation we would never have had the toxic loans which have been central to the mortgage meltdown.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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