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Is Home Affordable Refinance Program (HARP) Good for You? | Do you Qualify?

3  home affordable modification program

All you wanted to know about the Home Affordable Refinance Program (HARP).

Read on to find out the details about the program, the eligibility criteria, and the issues in implementing HARP.

 

What is Home Affordable Refinance Program (HARP)?

HARP is a U.S federal program established by the Federal Housing Finance Agency in March 2009 in response to the subprime mortgage crisis that erupted due to the housing bubble. This, in turn, was the primary root cause for the recession situation in the U.S during the2007-2009-time frame.

The housing prices in the United States started declining from 2006 that resulted in a credit crisis which then became anationwide emergency situation for banking sector due to thedevaluation of the properties and mortgaged securities.

The slowdown of the U.S economy and the subprime crisis in housing have resulted in significant reductions in real estate investment, housing hold spending and business investments in the United States.

The steep decline in housing prices made it very difficult for borrowers to refinance their existing loans due to higher interest rates and re-adjustment of the mortgage value due to devaluations. This resulted in higher monthly payments that transcribed into an increased number of mortgage-related delinquencies and loan defaults.

The extent of mortgage devaluations, lower credit quality, and massive loan defaults have become significantly visible in 2007 that resulted in a collapse of major financial institutions. The situation resulted in global recession due to significant reductions in credit flow and drop in business investments.

Millions of home loan borrowers were put in a very difficult situation in 2008 due to the burst of thehousing bubble. Many new and recent home loan borrowers were troubled as their value of the property went below the mortgage level and thereby the Loan to Value ratio (LTV) went beyond the required level preventing them from restructuring their existing loans to make it more affordable.

Banks normally require LTV at 80% or below to refinance without having Private Mortgage Insurance.

As a response to thesubprime crisis in thehousing sector, the U.S Federal government has introduced Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) in March 2009to bring back the investments into housing sector and making it affordable for the borrowers, service providers, and investors to stay invested.

The main purpose of these programs is to help those borrowers who are struggling to repay their loans and thereby opting for foreclosure, by reducing the loan burden to a level that is affordable by them at present and also sustainable over thelong term. This was achieved by means of:

  • reduction in prevailing interest rates
  • fixing the interest rates
  • restructuring of the loans by increasing the tenure
  • setting up forbearance clauses and other incentives to attract borrowers, investors and service providers.

HAMP offers restructuring of the existing loans so as to ease the burden on the borrower and thereby avoid foreclosure, whereas HARP offers complete refinancing option with the lowest interest rates that imply closing of the existing loan and offering a new loan with a reduced interest rate based on certain qualification criteria such as credit history, financial position and upon submission of necessary financial documentation.

The subprime crisis situation forced the Loan to Value (LTV) ratio to go up as a result borrowers have to pay extra to purchase Private Mortgage Insurance for the increased value of the LTV in order to stay qualified for the refinancing option to avail the lower benefits of interest rates.

For instance, if a house of value US $160,000 was purchased with a mortgage of US $120,000 (i.e. LTV of 75%) and due to market recession if the value of the property falls down to $100,000, thereby the LTV goes up to 120%.

In the above mentioned situation, if the borrower wants to go in for refinancing option, then he will have to pay for Private Mortgage Insurance (PMI). The additional cost towards the PMI attachment could overweigh the benefits and could be cost prohibitive to avail the refinancing option.


3 home affordable refinance program eligibilityThe introduction of Home Affordable Refinance Program (HARP) allowed those borrowers whose Loan to Value (LTV) ratio above 80% to avail the refinance option without paying Private Mortgage Insurance. HARP and “Making Home affordable” program is the same.

Originally at the time of introduction of this program, LTV was allowed up to 105% to qualify for this program. Later it has been increased to 125%. This means the borrower who owes a loan amount of US $125,000 and whose property value is $100,000 can still avail the refinance option and get the benefit of lower interest rates without paying any additional private mortgage insurance.

Do I Qualify for HARP? What are the criteria?

  • The original introduction of HARP allowed those mortgages that are owned or guaranteed by Freddie Mac or Fannie Mae, which are both government sponsored enterprises.
  • For a loan to be eligible under HARP program, a loan must appear in Freddie Mac or Fannie Mae loans. The market share of Fannie Mae’s is fairly larger than so Freddie Mac’s loans.
  • The acquisition of the mortgage by Freddie Mac or Fannie Mae should have been completed on or before 31st May 2009.
  • No previous history of the HARPrefinances of the mortgage unless it is a Fannie Mae loan that got refinanced between March and May 2009 under HARP
  • A good mortgage payment records of the current home owner. There should be no history of late payments for the current mortgage in the last six months and not more than one late payment in the last 12 months.
  • The property types that are eligible for HARP refinancing scheme are aprimary residence, one unit second home and one to four-unit rental property.
  • Based on the current value of the property, the Loan to Value (LTV) ratio must be greater than 80%. There is no maximum LTV limit for new fixed rate mortgage, however in thecase of adjustable rate mortgage the maximum LTV has been set to 105%.
  • There should be abenefit to the current homeowner either through lower monthly payment or switching to a more stable fixed interest rate mortgage that helps in long term.

 

What are the problems in HARP and why isn’t it working?

  • HARP insists that the mortgages are owned or guaranteed by Freddie Mac or Fannie Mae, which are both government sponsored enterprises.However, many homeowners do not know if their mortgages are linked to any of these organizations as these organizations do not directly deal with general public.

 

  • Many homeowners who purchase their home with less than 20% down payment are required to obtain Private Mortgage Insurance as a pre-condition to avail Freddie Mac or Fannie Mae home loans. However, HARP requires anew loan to provide the same level of PMI as that of the original loan. This is sometimes difficult and time-consuming task due to the resistance from private lenders as they are reluctant to refinance the PMI mortgage.

 

  • The idea behind the HARP refinancing, by making it affordable with low initial interest rates (although later adjustable) and minimal monthly payments and interest-only payment options did not recover the interest due for the month and that got simply added to the outstanding principal balance. This resulted in a double whammy situation for the homeowners as there is an increase in outstanding principal with the decline of the property value.

 

  • Adjustable rate mortgage options were packaged and sold as private securities. They were not sold to Freddie Mac or Fannie Mae. As a result, these options were not eligible for refinancing under HARP or HARP2.

 

  • The eligibility requirements for HARP/HARP2 states that this scheme applies only for mortgage loans which are associated with Fannie orFreddie loans. However, in thecase of private loans, the foreclosure rates are very high especially for borrowers who received high-risk loan products. These products were marketed very aggressively before the housing crisis.

 

HARP 2.0: What is HARP 2.0? How is this different than HARP 1.0?

HARP 2.0 was introduced after making some improvements to HARP1.0 to help responsible borrowers who were eligible under HARP.

There are two key changes to the second version of HARP.

  1. HARP 2.0 allows borrowers with mortgage insurance to be eligible for refinancing. This enables awider pool of home loan borrowers to avail this option.

 

  1. The new lender is not responsible for any fraud in the original loan. The new lender is responsible for any new fraud if that occurs during the refinance process.

 

  1. If the original lender doesn’t support HARP, then you can shift the mortgage to any other participating lender. This is a major change from original HARP to bring many people to have access to this program.

 

 

Borrowers who are interested in HARP 2.0 must have a credit score of at least 620 and should submit the necessary financial documents as a proof of income and assets to be able to qualify under this program.

 

What is HARP 3.0?

HARP 3.0 is an initiative from Whitehouse to bring in some reforms in themortgage market. This is also called “Better Bargain for Responsible Homeowners”. This bill is yet to be passed and these changes may take place in future as HARP 3.0 once the bill is passed.

The main purpose of this initiative is to extend the benefit of HARP refinance program to those home loan borrowers whose mortgages are not associated with Fannie Mae or Freddie Mac loans. This is a big deal because, although Fannie Mae and Freddie Mac control 90% of the U S housing mortgage, non-GSE lenders have seen a significant share in housing mortgage market last decade.

This clause will definitely help those millions of affected underwater homeowners whose mortgages are privately held. Once HARP 3.0 is introduced, then those homeowners whose mortgages are held by Alt-A, Jumbo, sub-prime loans etc. will become eligible for HARP loans.

Whether HARP 3.0 is going to come into effect or not, is a matter that will come to light in the future. But there are several good talks about this bill and how it is likely to help those millions of homeowners who are unable to avail this refinance opportunity.

HARP 3.0 is expected to cover the following:

  • A self-employed person who availed the original loan based on the stated income at that time will be able to avail this program based on the current income which needs to be verified through federal tax returns.
  • A borrower who opted for sub-prime loans at that time as the interest rates were lower or the fees was lower as compared to the present one.
  • A person living in thehigh-cost area who opted for Jumbo home loan whose original mortgage amount is in the range of $417,000 and $625,500.
  • A wage earner who conveniently used a stated income and/or stated asset for anavailing mortgage loan.
  • Sub-prime mortgage borrower having good track record of mortgage payments as agreed and if he can verify income and assets.
  • An Alt-A borrower whose FICO score / credit score was low at thedate of origination but have since improved.

 

As stated above, there are millions of U.S. homeowners who would meet HARP 3.0 eligibility and all can avail low mortgage rates once this program comes into effect.

Finally, what more is there to know about the HARP refinancing program?

The HARP eligibility amount is dependent on the type of the property and the location where the property is located.

There are increased loan limits for properties with multiple units. Please refer to the following table as a guideline for 2016 HARP loan eligibility amount.

1-unit property $417,000
2-unit property $533,850
3-unit property $645,300
4-unit property $801,950

 

Properties in high-cost areas are eligible for higher HARP loans where housing is more expensive. These are also called “Jumbo-Conforming” or “high balance” HARP loans. The table below summarizes the guidelines determined by Fannie Mae where housing is considered to be very expensive.

Higher HARP loan amounts are available in some areas. The below limits apply in areas where housing is more expensive, as determined by the property type.

1-unit property $625,500
2-unit property $800,775
3-unit property $967,950
4-unit property $1,202,925

HARP loan eligibility amount for properties in Alaska, Guam, Hawaii, and the Virgin Islands can even exceed the above-stated limits.

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