Sunday, February 5, 2012

Playing the HARP

On Wednesday the president unveiled his controversial plan to help homeowners who are current on their mortgage payments refinance their mortgages into federally insured loans at today's extremely low rates. This isn't really a new program, but instead attempts to turbo-charge an existing federal initiative called the Home Affordable Refinance Program. (HARP)

The plan seeks to help homeowners who are unable to take advantage of low lending rates because they owe more than their home is now worth, a predicament known as being "underwater" on their mortgage.

If you're ineligible for refinancing just because you're underwater on your mortgage, through no fault of your own, this plan can be a help. On his Wednesday speech the president said borrowers will be able to refinance at a lower rate, thereby saving hundreds of dollars that can become “disposable income” and will trickle down into the economy. The administration figures the plan will save borrowers as much as $3,000 annually, and believes this money will find it's way into the economy instead of into the banks coffers.

Obama went to great pains to stress that the new program is designed to help responsible homeowners who are hurt by falling home prices--not those buyers who overreached and bought more than they could afford. Millions of homeowners across the country are trapped in homes worth less than the mortgage they carry, and thus are unable to refinance to improve their cash flow. The program will not address the issue of investment. Homeowners will still own a home worth less than its mortgage and taxpayers would be at risk if these homeowners eventually walked away from their new loans.

The program's cost is estimated at between $5 billion and $10 billion. To pay for it, Obama proposed a tax on the nation's biggest banks. Opponents suggest that numerous administration efforts to assist homeowners have failed and that the housing market instead needs to be allowed to bottom on its own.

Naturally the banks are not anxious to lower the rates they are now charging, and so the financial sector didn't expect the president's proposals to advance.

"We all agree that getting any legislation through will clearly be an uphill battle," said David Stevens, president of the influential Mortgage Bankers Association.

Consumer advocacy groups applauded the proposal and the bank tax that would pay for it. The plan would let the Federal Housing Administration, Freddie Mac and Fannie Mae insure underwater mortgages up to 140 percent of current appraised value. A home could be worth 40 percent less than its appraised value and still qualify for insurance on a refinanced mortgage. The bank tax would be used to bolster the reserves of the Federal Housing Administration.

The program—which is now a proposal--was rolled out to borrowers whose loans were backed by Fannie Mae and Freddie Mac and who were current on their payments. The idea was simple: If you were making your payments on time but didn't have enough equity to refinance, you would be able to lower your rate without having to pay down your mortgage balance.

Initially, the program was limited to borrowers who owed between 80% and 105% the value of their homes. In mid 2009, the program was opened to borrowers who owed up to 125% the value of their homes.

But a series of unforeseen "frictions" have led fewer borrowers to take up on the offer of lower rates. Fewer than 900,000 homeowners have refinanced under HARP over the past 2½ years. The requirements are as follows:

  • You must live in the home being refinanced.
  • The program only applies to Fannie Mae or Freddie Mac mortgages.
  • The homeowner must be able to afford the new lower payment.
  • Your current mortgage must be up to date with no late payments in the past twelve months.
  • Payments on the new loan must be more affordable or more stable than on the existing loan.
  • The new mortgage balance may not exceed 125% of your home’s current value.
  • The maximum Loan to Value (LTV) cap has been removed for fixed rate mortgages.
  • Homeowners looking for an adjustable rate mortgage the maximum LTV is set at 105%.
Dane Hahn is a real estate professional practicing in Englewood. He can be reached at 941-681-0312 or by email at See him on the web at

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