Mortgage rates are still at rock bottom levels, but many
homeowners haven’t been able to refinance into lower cost loans.
But the government wants to change that.

Two years ago, the Home Affordable Refinance Program (HARP) was
unveiled to help homeowners with less than 20% in home equity to
refinance into less expensive loans. But since Fannie Mae and
Freddie Mac can force lenders to buy back mortgages with faulty
underwriting standards, the program’s success was stifled by gun
shy lenders.

Since then, HARP has been overhauled. Borrowers – even those
with mortgages that exceed the value of their homes – who have made
their last six mortgage payments and are employed or have a source
of income, could qualify to refinance under HARP. Also, loan fees
charged by Fannie and Freddie would be reduced or eliminated for
borrowers that refinance into shorter-term mortgages.

HARP’s revamped program could spur refinancing because it
permits banks (NYSEArca: KBE) to avoid the risk of buying back bad
loans, so long as borrowers conform to the program’s guidelines.
HARP is expected to begin in early December.

The average rate on a 30-year fixed mortgage is 4.11%, according
to a Freddie Mac survey. Fixed 15-year loans are near 3.50%.
Because of restrictive lending standards and risk adverse banks,
many homeowners have not been able to refinance into lower cost
home loans.

Federal Housing Finance Agency (FHFA) estimates that up to one
million more borrowers should be able to refinance under the new
guidelines. FHFA regulates Fannie Mae and Freddie Mac. 

Mortgage loans that exceed the 125% borrowing limit of a property’s
value won’t be eligible to participate in HARP until early next
year.

HARP was originally set to expire in June 2012 but was extended
through 2013.

Will HARP inject life into the beleaguered housing market
(NYSEArca: XHB) and spur refinancing? Since roughly 60% of the U.S.
mortgage market is controlled by just four banks, there is less
lending competition and getting the cooperation from these large
institutions will be a must.

Many problems still remain in the mortgage and housing markets,
but HARP could be a start toward helping qualified borrowers to
reduce the cost of their mortgages.

The 2011 performance of stocks tied to the housing market has
been a mixed bag. Since the beginning of the year, homebuilding
stocks have declined around 6.50%. Meanwhile, the iShares FTSE
NAREIT Residential ETF (NYSEArca: REZ), which focuses on apartment
building owners is ahead by 8.21%.

Finally, a wave of refinancing won’t be good news for
everyone.

Investors holding mortgage backed securities (NYSEArca: MBB)
could lose billions of dollars in income from paid offmortgage
loans. Large mortgage investors, like the Federal Reserve, will be
given cash to reinvest at today’s depressed rates. How will they
redeploy all that capital?

More importantly, how should you be investing in the current
credit and interest rate environment?

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