Negative Equity, Not Sub-Prime to Blame; New 125% Refi LTV

Two interesting discussions are going on right now over at VAR buzz (Disclosure: I wrote one of the posts). The first is about the Home Affordable Refinance Program (HARP) increasing their loan-to-value (LTV) limits from 105 to 125 percent. The second is about how it’s negative equity loans, not subprimes or “liar loans” that are to blame for the foreclosure crisis.

HARP’s new 125% LTV ceiling

Regarding HARP’s new LTV ceiling… Some think that HARP is a horrible solution and that the new LTV ceiling will leave homeowners “stuck” in their home. I disagree and here’s why:

If homeowners were allowed to borrow more than what they currently owned, HARP would be horrible solution because it puts people further into debt. But HARP does not allow people to borrow 125% of their home value unless they owe that much already. It is a refinance – not a new purchase nor “cash out.”

“Upside-down” homeowners are already “stuck” in their home whether they refinance or stay in their current mortgage. Their property will still be worth $X, they will still owe $Y on their mortgage and their LTV will still be at 125% whether they refinance through HARP or not.

As Sweth (one of the commenters on the post) said, this is not the Home Affordable Modification program - that’s a different program - nor a neg am loan. This is simply a way to refinance the same amount you currently owe into a fixed rate mortgage at a potentially lower interest rate.

If homeowners were allowed to borrow more than what they currently owned, HARP would be horrible solution because it puts people further into debt. But HARP does not allow people to borrow 125% of their home value unless they owe that much already. It is a refinance – not a new purchase nor “cash out.”

Negative equity loans, not subprimes to blame

The other post is about how it’s negative equity loans, not sub-primes or “liar loans” that are to blame for the foreclosure crisis.

I can see where the author is coming from. Homeowners that took “zero down” or even “103 percent financing” (aka negative equity loans) had no financial stake in the property from the start. Many bought a house with less than $100 out of their own pocket. Heck, some even got money back! If you have no stake in something, you’re much more willing to let it go especially when you’re looking at a 10, 20, 40+ percent “loss” if you sell it.

And as property values fell, people were continuously counting how much money there were “losing” - the more they “lost”, the more willing they were to just walk away and be foreclosed on. If property values didn’t fall as much or were increasing, people would think twice before being foreclosed on because the may “make money on their home.” Primarily only those who were truly facing financial hardship would be foreclosed on because they wouldn’t be able to pay the mortgage regardless.

But this may very well be a, “Which came first, the chicken or the egg?” type of discussion.

What do you think?