In March of 2009, the Federal Government working through the Federal Housing Finance Agency (FHFA), established HARP, the Home Affordable Refinance Program. The program was created in the wake of the housing/financial crisis of 2008 with its primary purpose being to help “underwater and “near underwater” homeowners refinance their homes. Unlike its sister program HAMP, the Home Affordable Modification Program, which was created to help seriously delinquent homeowners avoid foreclosure by modifying their mortgages, HARP is designed to help homeowners that are current on their payments refinance their loans even though the value of their home is less than the mortgage balance.
HARP was originally created 2009 to include only homeowners that owed more than 80% but less than 105% of the value of their home. HARP would allow the homeowner to refinance their underwater mortgage without having to pay for Private Mortgage Insurance or PMI. The program was revised later that year to include homeowners that owed up to 125% of the value of their home. In other words, a homeowner that owed $125,000 on a property worth only $100,000 could refinance their mortgage, potentially lowering their monthly mortgage payment and/or locking the homeowner into a lower fixed rate mortgage. In December 2011, HARP was revised again, referred to as “HARP 2.0”. Under HARP 2.0 there would no longer be a limit on the “negative equity” on mortgages up to 30 years. So, regardless of how far underwater you are on your mortgage, you could qualify to refinance your current loan without paying PMI. As would be expected, there are several government guidelines, requirements and criteria in order to qualify. The mortgage company may impose additional criteria as well. The major government requirements are:
- 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 appears to be working. According to a recent Bloomberg.com article, 68% of all homes refinanced in Nevada and 58% of all homes refinanced in Florida in 2012 were done under HARP. In total, there were 1.1 million homes refinanced under HARP in 2012 nationwide. This exceeded the FHFA estimates for the program and is good news for several reasons.
First, underwater homeowners (those who owe more than their home is worth) are far more likely to default than homeowners that owe less than the value of their home, assuming both groups are current on their payments and can afford the payments going forward. HARP, at least in theory, should help stem the tide of these so called “convenience defaults”. These are defaults that occur not because the borrower is behind and cannot afford the payments, but because the homeowner sees no reason to continue to pay for an asset that will take years, maybe decades, to readjust to normal values. Another reason this is good news is that because these homeowners are refinancing and staying in their homes instead of letting them go into foreclosure, the housing market overall can benefit from fewer foreclosed homes on the market, as well as, helping to stabilize home prices. Cities and states nationwide have seen dramatic decreases in home prices since 2008.
According to an article on Kiplinger.com, two Tennessee cities are leading the nation in the percentage drop of homes prices since the peak in 2007. In Knoxville, TN, home prices have dropped 18.9% since 2007. According to local realtor Amanda Stone, 17% of all home sales in 2012 were short sales or foreclosures, roughly the same amount as 2011. In Memphis, TN it is far worse. Memphis has seen a 44.5% decrease in home prices since 2007 and roughly 30% of all sales were distressed properties.
Keeping borrowers in homes that they can afford to pay for is hugely important to the housing recovery. Again, HARP is not intended for borrowers that cannot afford their house payments or are behind and facing foreclosure, but for borrowers that choose not to pay their mortgage. When these homes go into foreclosure, the price drop of these homes is often far greater than normal. These borrowers are already under water on the mortgage. If the home is foreclosed and sold at auction it will typically sell for even less than the appraised value (which was already less than the loan). This will further increase the drop in home values. Keeping these homes out of foreclosure is a giant step needed in stabilizing the drop in home prices.
Stabilizing home prices may be the most crucial step in restoring the housing market. Since this crisis began in 2008, the US has seen a steady drop in home prices. While this may seem good on the surface, in reality it is very bad for the housing market and the economy as a whole. This is called deflation and it is one of the primary reasons the housing market has not recovered more. In a deflationary environment, prices for an asset start falling (in this case home prices). As a buyer of the asset, you are more likely to wait to purchase the asset because it will cost less next month than it does now. This behavior can create what is called a deflationary spiral, a phenomenon in which lower prices for goods leads to lower production of goods, which leads to lower wages, which leads to lower demand for goods, which leads to further decreases in the price of goods. The Great Depression is often viewed as a deflationary spiral.
For now, HARP offers a glimmer of hope. What remains to be seen is whether HARP, and other similar government programs, will have any lasting effect on not only slowing the rate of foreclosures but stabilizing home prices. But for now, let’s celebrate at least one government program that appears to be doing what it was intended to do.