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