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Unfortunately, HARP 3.0 Won't Pass

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HARP 3.0, the long fabled upgrade to HARP 2.0, is going to fail. Miserably.

While it isn’t officially called HARP 3.0, the Responsible Homeowner Refinancing Act of 2013 which contains HARP’s new details, does indeed propose improvements to the second iteration of HARP, also known as HARP 2.0.

HARP 3.0 is attempting to allow borrowers who have mortgage loans that are not guaranteed by Fannie Mae and Freddie Mac to be eligible for refinancing. The proposed law would also allow borrowers who have jumbo mortgages and Alt-A mortgages to be eligible for a HARP refinance loan. Finally, it seeks to remove HARP’s current restriction of disallowing borrower’s who have loan-to-value ratios of 80 percent or less.

Unfortunately, and despite its good intentions, it is slated to fail in the Senate with only a 2 percent chance of being enacted into law — never mind its dismal 20 percent chance of getting past its current committee. Barring some kind of miraculous surge in support, it is all but assured to be defeated.

Why is this happening though? Why would such a potentially beneficial bill be doomed to failure?

Finger-pointing at politicians aside, there have to be more technical reasons for this failure to assist the many millions of Americans who want to refinance their mortgage loans.

To Kill a Bill

Tim Lucas, editor of MyMortgageInsider.com, told loans.org that while the bill has some positive benefits, these very same benefits may end up killing the bill.

“The cost of appraisals would go to Fannie Mae and Freddie Mac,” he said. “Any borrower whose home does not receive an appraisal waiver needs a manual appraisal at a cost of $350 to $450 each on average. Imagine hundreds of thousands of appraisal bills showing up on Fannie and Freddie's doorstep. That could get spendy.”

Lucas continued to explain that the bill aims to remove loan level price adjustments for loans that are already guaranteed. These fees can be upwards of 2 percent of the entire refinance loan amount. Potentially, this would have been a sizable loss of revenue for lenders — just as the economy and housing sector are starting to recover.

Worse still, Lucas feels the bill exposes the economy to a repeat of the mistakes of the past.

“This bill states a borrower can't be denied because he doesn't have a job,” he said. “Fannie Mae and Freddie Mac are just now bouncing back from the risky lending they did in the 2000s. This guideline may be too reminiscent of those times.”

A Failed Future without Refinances

Despite its own mistakes and errors, the bill and its backers would have aided many borrowers in need of refinancing.

Lucas said that the bill would have reduced refinancing costs by removing the mortgage loan level price adjustments and appraisal costs. Since the cost to refinance is very prohibitive for many borrowers, lower upfront costs would have allowed many homeowners to refinance their mortgages. Of course, now that the bill has an infinitesimal chance of passing, many mortgage loan borrowers will be locked out of refinancing.

“This bill would have evened the playing field between HARP-eligible homeowners, and those who are ineligible because they have more than 20 percent equity in their home,” said Lucas. “Right now, underwater homeowners often get a better deal than homeowners with a lot of equity. That's because of special guidelines set up for HARP 2.0 loans. This bill would have encouraged those who have faithfully paid down their mortgage to refinance.”

The Self-Preservation of Politicians

Regardless of the technical mistakes of the bill and how prone it is to repeating mistakes from the housing crisis there is a much more human reason why support for the Act is paper thin.

“I'm not an expert on politics, but if I were a lawmaker, I'm not sure I would want my name on a bill that may end up costing taxpayers a lot of money if it goes south,” said Lucas. “Still, I'm a little surprised at the lack of support. It seems politicians have a lot more to gain by attempting to help people stay in their homes and reduce homeownership costs. Perhaps there's more politics than common sense playing out here.”

While the fate of HARP 3.0 is all but certain, mortgage loan borrowers who are a bit underwater should take comfort in the possibility that all is not lost. This latest version of HARP 3.0 is just a second attempt following a similar failure in 2012. A third run in 2014 may bear more fruit and the 2014 political climate may cause Senators to change their minds. Combined with the ongoing slow, but continuous, economic recovery, things are looking better for homeowners and current mortgage loan borrowers by the month.