As many of you may recall I sent an open letter to the President last month begging for a refinance relief plan for underwater, but current borrowers.  Yesterday the Federal Housing Finance Agency (FHFA) announced changes to the ineffectual HARP plan.  (They are the guys that took over stewardship of Fannie Mae and Freddie Mac when they became insolvent a couple years back).  The most significant change was that they removed the cap which restricted the amount you could be underwater to 125% of the appraised value.  It’s a reflection of just how bad the valuations have gotten that 125% isn’t enough.  None the less, it addresses an important gap in the relief efforts of upstanding borrowers.  You have to be current on your payments and not missed more than one payment in the past 12 months and zero in the past 6 months.  (Yes it’s a shame that so many borrowers have strategically defaulted in an effort to get their loan modified – usually unsuccessfully – and now they don’t qualify because they’ve missed so many payments),  The good news is that I suppose the could start making payments in an effort to qualify for the program, but admittedly that seems unlikely to happen.

As I said in my blog last month, this type of program is a win-win for everyone in the country, not just those borrowers who’ve paid their bills but their home value as dropped.  It costs us nothing and should infuse the consumers with extra cash which will be spent further aiding our ailing economy.  So now borrowers are going to be able to refinance  regardless of their appraised value.  One sort of odd note is the program’s emphasis on getting borrowers to take shorter term loans to refinance into; ie: 5 and 7 year loans.  Their suggestion is that this approach will allow borrowers to pay an even lower interest rate and thereby be able to pay down the loan faster.  Personally, I like short term loans for myself – I’ve never kept a loan 30 years nor will I likely ever, however, I seldom recommend them for my clients.  Why? because there is risk that rates may rise and the payment could become too large to handle, forcing an eventual sale.  On the other hand, with rates so low, the lifetime cap is equally low.

I refinanced in January 2010 when rates spiked – typical right?  So rather than take the conservative 30 year loan, I opted for the 5 year at 3.25%.  Since the lifetime cap was 5% above the start rate, I figured that at 8.25%,  the highest it can ever go to, I would be OK.  As a point for you younger readers who only know low single digit interest rates, when I started selling in 1990, rates were 10.75%.  When I got started college rates were 18%.  Thus given a cap of 8.25%, I figure it’s a pretty shrewd bet.  Yet there is risk with this approach especially given a 30 year fixed is at an historic mid 4% rate.

As to the effect theRealEstateConversation,com had on changing government policy, I will gladly accept credit for the FHFA’s decision and also that of the President who pressured the Agency heads for their decision to modify the largely ineffective original version of HARP.  I did after all email my Open Letter To The President to every one of our 100 US Senators as well as all my local reps too and the heads of the 4 largest banks.  Alas, I was neither the first to suggest it nor did the President likely read my letter.  But I’m taking credit for it anyway.

I also take pleasure in this reflection:  In February I attended the wedding of a cousin in Newport Coast, Ca.  He’s a very successful entrepreneur selling foreclosed properties across some 13 or so states.  Knowing I was in the real estate business too, he sat me at a table with a rather high, middle-upper manager with Fannie Mae in Texas.  After few glasses of champagne, conversation turned to Fannie Mae and the whole mortgage mess.  I went into my diatribe about compelling Fannie and Freddie to allow underwater borrowers to refinance regardless of equity position.  This lady however, would have none of it.  She said it couldn’t be done, there are banks and investors and I just didn’t understand the complexity of the situation of which I spoke.  Clearly it was she that did not get what I was talking about.  Naturally the conversation became more heated as the dinner went on (I’m sure the wine had nothing to do with it).  Finally, my wife Tama, pulled me onto the dance floor (Queen’s, “Another One Bites the Dust” will do that to you).  “Stop haranguing the lady”.  She said, “Obviously she doesn’t agree with you; you aren’t going to change her mind, you’re being obnoxious and she knows more about it than you do so she’s probably right… even though I like your idea”.  Isn’t it amazing how your spouse can give you a complete smack down yet smooth it over with an, “even though I like your idea”?  Amazing.  But to that fine lady from Texas I say, “Hah, I told you so”!

Join me next blog when I solve the mystery of the universe and provide solutions for world peace.  By the way, if you want to read the specific changes to the HARP program, here is the link: http://www.fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf