Most of us remember the devastation that was caused by the collapse of the housing market almost 10 years ago. In early 2006, housing prices peaked; they began to decline in 2006 and 2007, and on December 30, 2008, the Case-Shiller home price index reported the largest price drop in its history.
The housing bubble had officially burst.
Millions of home owners found themselves in dire straits after the housing collapse. Inventories soared nationwide and home prices plummeted, and as a result, many homeowners saw the value of their homes drop below the balance of their mortgages.
This condition is referred to as “being underwater.” A home owner is underwater when the value of their home is less than what they owe on their mortgage.
To combat this massive problem, the federal government took extraordinary measures to shore up the U.S. housing market and economy. In 2008 alone, the government allocated over $900 billion to special loans and rescues related to the housing bubble.
Part of this money was used to create the Home Affordable Refinance Program (HARP).
The HARP Program
HARP is a federal program that was created to help underwater and near-underwater homeowners refinance their mortgages. In order to qualify for this program, home owners have to be current on their mortgage payments, but also unable to refinance their mortgage loans due to plummeting home values.
To date, the HARP program has helped over 3 million American homeowners refinance into a lower rate and payment, even though they owe more than their home is worth.
A HARP loan is the best way to refinance if you are underwater on your mortgage.
Let’s look at a typical example:
Let’s assume a home owner purchased his home for $160,000 but today, it’s only worth $100,000 due to the market decline. Let’s assume further that the home owner owes $120,000 on his mortgage.
In this example, the loan-to-value ratio would be 120%. Because of this extremely high loan-to-value ratio, the home owner would be required to pay for private mortgage insurance (PMI) if he chose to refinance.
This additional cost of PMI reduces the benefits of refinancing his home, so essentially he is prohibited from doing so.
The HARP program solves this problem by allowing home owners with loan-to-value ratios which exceed 80% to refinance their mortgages, but not having to pay for private mortgage insurance.
In our example, even with a loan-to-value ratio of 120%, the home owner would now be able to refinance his mortgage and lock in a lower interest rate.
As the HARP program was being rolled out nationwide, there were many amendments and changes made to the program to adapt to the brutal conditions in the housing market at the time. In December 2011, the government instituted several rule changes to the program and this development became known as HARP 2.0.
In addition to acceptance of greater loan-to-value ratios, the program also expanded to include home owners who were already paying PMI on their loan.
In addition, mortgage lenders were guaranteed not to be held liable in the event that fraud was committed on the original loan.
This assurance greatly enhanced the willingness of lenders to participate in the HARP program.
HARP 2.0 and PMI
During the housing bubble, many people purchased their homes with a down payment that was less than 20% of the purchase price. In those cases, lenders required borrowers to pay for private mortgage insurance (PMI). With Freddie Mac or Fannie Mae loans, this was a common practice.
Any loan with PMI attached to it was easier to sell on the Wall Street secondary market. PMI reduced the risk associated with a high loan-to-value ratio by offering insurance against foreclosure for any investor who ultimately owned the "whole loan".
Although HARP 2.0 allows home owners with PMI to participate in the program, many home owners have faced reluctance from their original lenders to refinance their loans. HARP requires the new loan to provide the same level of mortgage insurance coverage as the original loan.
Because meeting this requirement can be difficult and time-consuming, many original lenders have balked at refinancing a PMI mortgage.
To overcome this difficulty, HARP 2.0 allows home owners to do business with any lender that is willing to refinance their loan, so they are not disadvantaged if the original lender is unwilling to offer a HARP refinance.
Types of Occupancy
Though most people believe that the HARP program applies only to single-family home owners, it actually pertains to all types of occupancy structures – primary residence (owner-occupied), second home, or investment (rental) property.
However, investment properties that are backed by Fannie Mae and Freddie Mac carry higher mortgage loan rates than owner-occupied properties.
HARP 2.0 also offers applicants the opportunity to forgo a home appraisal as long as a reliable automated valuation model is available in their area.
An automated valuation model, or AVM, is a program which produces a property value derived from mathematical calculations. AVMs are generally produced online which makes it especially appealing and convenient for both borrowers and lenders alike.
Though this HARP 2.0 feature can save a borrower time and money, it is typically subject to approval by the mortgage lender.
Do you qualify for a HARP loan?
In order to qualify for a HARP mortgage loan, specific criteria must be met. In addition to what the government requires, your lender might also insist on other criteria, so be aware of that possibility.
Below are the requirements for the HARP program as defined by the federal government:
- The existing mortgage loan must be owned or guaranteed by Freddie Mac or Fannie Mae. (Many homeowners do not realize that their mortgages are owned or insured by one of these organizations, given that they do not deal directly with the public).
- Freddie Mac or Fannie Mae must have acquired the mortgage on or before May 31, 2009.
- The home owner cannot have previously refinanced their mortgage through HARP, unless it is a Fannie Mae loan that was refinanced under HARP during March-May 2009.
- The homeowner must be current on their mortgage payments, with no late payments in the last six months, and no more than one late payment in the last twelve months.
- The current loan-to-value ratio of the property must be greater than 80%.
- The homeowner must materially benefit from the loan by either lower monthly payments, or placement in a more stable loan product (such as going from an adjustable-rate mortgage to a fixed-rate mortgage).
A New HARP 3.0
In his State of the Union address in 2012, President Barack Obama referenced a plan to give "every responsible homeowner the chance to save about $3,000 a year on their mortgage".
People began to refer to this plan as HARP 3.0. However, it has yet to be enacted into law. But within the mortgage industry, some industry sources believe that this newer version of HARP will be available to home owners by October 1, 2017.
If that happens, it is expected that HARP’s eligibility requirements will be expanded to homeowners with non-Fannie Mae and non-Freddie Mac mortgages, including homeowners with jumbo mortgages and Alt-A mortgages.
In addition, there will be other new guidelines that will allow more home owners to participate in the HARP program.
For the time being, however, interest rates are still at historically low levels and so if you qualify for a HARP mortgage, you should take advantage of the opportunity to refinance your home.
For our editor's selection of the best mortgage refinance companies available, check out the 10 top-rated companies of the year to see which one is the right fit for you.