Millions of homeowners found themselves in a difficult predicament after the U.S. housing bubble burst in 2006. As inventories soared nationwide, home prices plummeted. Many new homeowners saw the value of their homes drop below the balance of their mortgages, or nearly so. Later, these same homeowners were prevented from taking advantage of lower interest rates through refinancing, since banks traditionally require a loan-to-value ratio (LTV) of 80% or less to qualify for refinancing without private mortgage insurance (PMI). Take for example a house that was purchased for $160,000 but is now worth $100,000 due to the market decline. Further, assume the homeowner owes $120,000 on the mortgage. In this scenario, the loan-to-value ratio would be 120%, and if the homeowner chose to refinance, he would also have to pay for private mortgage insurance. If the homeowner was not already paying for PMI, the added cost could nullify much of the benefit of refinancing, so the homeowner could be effectively prohibited from refinancing.
The Home Affordable Refinance Program (HARP) was created by the Federal Housing Finance Agency in March 2009 to allow those with a loan-to-value ratio exceeding 80% to refinance without also paying for mortgage insurance. Originally, only those with an LTV of 105% could qualify. Later that same year, the program was expanded to include those with an LTV up to 125%. This meant that if someone owed $125,000 on a property that is currently worth $100,000, he would still be able to refinance and lock in a lower interest rate. In December 2011, the rule was changed yet again, creating what is referred to as “HARP 2.0”; there would no longer be any limit on negative equity for mortgages up to 30 years – so even those owing more than 125% of their home value could refinance without PMI. Also, the program was expanded to accept homeowners with PMI on their loan. Finally, any new mortgage lender was guaranteed not to be held responsible for fraud committed on the original loan. This greatly expanded the willingness of lenders to participate in the program.
Certain criteria must be met to qualify for HARP. While there may be additional criteria imposed by the mortgage servicer, the government requirements are as follows:
- The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae. Many homeowners are unaware that their mortgages are linked to one of these organizations, since neither Freddie Mac nor Fannie Mae deals directly with the public.
- The mortgage must have been acquired by Freddie Mac or Fannie Mae on or before May 31, 2009.
- The homeowner must not have a previous HARP refinance of the mortgage, 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 (30-day) 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 (LTV) of the property must be greater than 80%.
- The homeowner must benefit from the loan by either lower monthly payments or movement to a more stable product (such as going from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage).
HARP 2.0 and PMI
Many people who purchased their home with a down payment of less than 20% of the purchase price were required to have private mortgage insurance (PMI). This is common practice with Freddie Mac or Fannie Mae loans. Having PMI attached to a loan made that loan easier to sell on the Wall Street secondary market as a “whole loan”. PMI hedged the risk brought by the high loan-to-value ratio by offering insurance against foreclosure for whomever owned the “whole loan”.
Although HARP 2.0 allows homeowners with PMI to apply through the Making Home Affordable Refinance Program, many homeowners have faced difficulty refinancing with their original lender. HARP requires the new loan to provide the same level of mortgage insurance coverage as the original loan. This can be difficult and time-consuming, especially in the case of lender-paid private mortgage insurance (LPMI). As a result, many lenders are reluctant to refinance a PMI mortgage.
Fortunately, HARP 2.0 enables homeowners to go to any lender to refinance, so the mortgage holder is not stymied if the original bank is unwilling to pursue a HARP refinance.