HARP Program Background

HARP program – Home Affordable Refinance Program

Background

Millions of American homeowners found themselves in a challenging situation after the U.S. housing market burst in 2006.  Inventories soared nationwide, causing home prices plummet from lack of demand. Many new homeowners, those that purchased their home near the top of the bubble, saw the value of their homes shrink below the balance of their home mortgage.  Later, as a result of the loss of value, these same homeowners were prevented from benefiting by lower rates through refinancing.  Banks typically require that the home’s value exceed the loan amount so that the property can secure the loan.  In fact, they require some price cushion for market changes, so historically you will see that banks require a loan to value (LTV) of 80% or less to qualify for refinancing without private mortgage insurance.

Take for example a house that was purchased for $300,000 but is now worth $220,000 due to the market decline. Further, assume the homeowner owes $260,000 on the mortgage. In this scenario, the loan-to-value ratio would be 118%, and if the homeowner chose to refinance, he would also have to pay for private mortgage insurance (PMI). According to Adam Heaney of Emery Financial in Newport Beach, CA, the large inventory of “homes underwater” that have negative equity issues is one of the top challenges to housing’s recovery.  If the homeowner was not already paying for PMI on her original loan, the the PMI costs and often erase the benefits of refinancing at lower rate. So the homeowner is stuck; either because they can’t qualify at all, or if they only qualify because of the addition of PMI, then the monthly costs of PMI effectively increases their payment anyway.

Given the need to help people stay in their homes, and to support the U.S. economy – by elping underwater homeowners to lower their mortgage payment, the Home Affordability Refinance Program (HARP) was created in March 2009 by the Federal Housing Authority.  The program was designed to help those with loan to value ratios exceeding 80% to refinance without the need to maintaning monthly PMI payments.  Originally, HARP only helped those with a maximum LTV of 105%.  After a number of months, the HARP program was expanded to help homeowners up to 125%, thus a person with a $125,000 loan on a $100,000 could refinance and befefit by a lower rate and lower payment.

With the announcement of HARP 2, the Loan to Value limits have been eliminated entirely, allowing any homeowner with an underwater mortgage, even beyond 125% to get a loan.