Sen. Merkley's RAH Program for Underwater Borrowers

Will RAH (Rebuilding American Homeownerhip) be the new HARP 3?

Harp 1, HARP 2, and still counting. Sen.Jeff Merkley (D-Oregon) introduced a mass refinance proposal, called RAH (Rebuilding American Homeownership), to help the more than 11 million underwater borrowers refinance into a lower interest rate loan.

Merkley’s proposal follows a number of other proposals designed to help underwater borrowers, stimulate the housing market, and boost the economy, including these proposals:

• The Boxer-Menendez Law- This proposal improves the HARP 2.0 program. The intent of the law is to get more Fannie Mae and Freddie Mac borrowers approved for the HARP loan at more competitive rates.
• The Obama Refinance plan- This proposal aims would expand the number of borrowers eligible for a HARP-like program. The White House launched a social media campaign, #MyRefi, to push for public support. The Obama Refi plan would make low-interest loans to borrowers whose loans are not through Fannie Mae or Freddie Mac.

It is not clear if any of these proposals will become law. Sen. Merkley’s RAH plan is a concrete step to put some of the ideas in the Obama Refinance plan in place in an operational HARP 3.0 program.

Rebuilding American Ownership Program - Eligibility

Currently there are program that help certain underwater borrowers refinance at today’s low rates, including:

• HARP 2.0 for Fannie Mae and Freddie Mac
• FHA Streamline for FHA borrowers
• IRRRL for VA borrowers.

These borrowers have maintained their payments despite watching their equity drop. They can’t sell their underwater property without permission from their lender or bringing enough money to the table to repay their loans. They are unable to refinance and benefit from historically low mortgage rates, despite the fact that they have responsibly made their mortgage payments on time.

Sen. Merkley’s RAH program provides an opportunity for all underwater borrowers to refinance, if they meet two general criteria:

1. They are current on their loans.
2. They meet ordinary underwriting criteria.

Merkley’s RAH proposal paper does not give full details describing the exact terms. Underwriting criteria are complex and include many rules and guidelines, including: credit scores, credit history, income verification, debt-to-income ratios, appraisal reports, and loan-to-value (LTV) ratios.

General Terms of the RAH Loan: The 4% Loan

Sen. Merkley’s proposal aims to help homeowners either build equity fast or lower their monthly payments so they can save money each month. He has proposed three types of loans as follows:

1. The 4% loan: This loan is a 15-year mortgage loan that will allow the borrower to make approximately the same payments as their current loan, but build equity in their homes much faster.
2. A 5% loan (approximately): The second type is a 30-year 5% mortgage loan that will lower the monthly payment, reducing cash-flow struggling borrowers.
3. A hybrid loan: The third option, coined a "soft second" is more complicated. This option strips off part of a borrower's loan into a second loan that does not require any payments (and does not accrue interest) for a five year period. This will put even more money into a borrower’s pocket.

All loans will require mortgage insurance until the LTV reaches 80%. No short sales are permitted during the first four years.

Mechanics/Funding the Rebuilding American Ownership Program

Similar to the Obama Refi plan, Sen. Merkley claims that RAH will not cost the taxpayers any money. On the contrary, the loans will make money. He proposes two possibilities, a government guarantee (like an FHA loan) or creating a RAH Trust Fund. The proposal deals with the mechanics of a RAH Trust Fund. The program would run for three years.

Any mortgage lender can originate a RAH loan to an eligible borrower. The government will back the loans and sell them to the capital markets at a low risk interest rate. That means a lower interest for the borrower. The projected interest rate is about 2 points over the rate the US government borrows.

RAH - A HARP 3 Proposal - Is it Feasible?

Sen. Merkley points out that there are risks to the program, but claims that doing nothing carries more risk as defaults, short sales and foreclosures are even more costly. Two leading economists, Joseph Stieglitz and Mark Zandi wrote a column for the NY Times supporting the plan. They both believe that more needs to be done to help underwater borrowers and stabilize the housing market. The plan calls for more government involvement in the mortgage market.

The RAH is a politically charged program and most likely will face opposition in Congress. Sen. Merkley says that no taxpayer money is required and the program will bring in income. However, just the mere fact that the program involves a government guarantee and a government agency to run it spells out a possible loss.

As Washington gears up for the fall session, before the November 2012 elections,the Rebuilding American Ownership - the 4% mortgage, will be just one HARP 3 proposal on the Congressional plate.