It’s been one of the hottest topics in the mortgage industry since it was announced in March, and two months later, HARP 2.0 is still making headlines. And with more than 22.8 percent of all residential properties considered underwater, it’s no surprise that homeowners are anxious to see how HARP 2.0 could turn their negative equity positive.
With all the talk about HARP 2.0, you might be wondering how the program even started in the first place. Since there’s version 2.0, you would logically conclude there was a previous version. And you’re right, but it was much different than the program that exists now.
What was HARP Before HARP 2.0?
The original HARP program was a lifesaver for some homeowners, but it was only available under very specific circumstances. For example, if you had a loan-to-value ratio greater than 125 percent, you were not eligible for the program. So, if your home was worth $100,000, but your loan was worth $125,001 or greater, you weren’t eligible for the program.
You also couldn’t have missed any mortgage payments for any reason. Period. And, in some cases, shorter-term loans carried much higher fees than borrowers expected. Another limiting rule was that if you had mortgage insurance, only your existing servicer could offer you a refinance. Basically, many people were in much more dire circumstances than the rules of this program allowed, and it became necessary to expand the guidelines.
How Did We Get to HARP 2.0?
The U.S. housing bubble burst in 2006 left millions of homeowners underwater on their homes and unable to refinance and receive the lower interest rates that became available. Banks typically require a loan-to-value of 80 percent (meaning your loan should be $80,000 if your home’s value is $100,000) in order to refinance.
Millions of homeowners who experienced price crashes had loan-to-value ratios that far exceeded this standard, so they were unable to take advantage of the historically low interest rates. Facing mounting political pressure to do something about this problem, President Obama called on Congress to expand the eligibility criteria for HARP. And that’s precisely what Congress chose to do.
Why is HARP 2.0 Such a big Deal?
The new version is a huge deal to American homeowners because approximately 5 million found themselves in the trap of having a loan-to-value ratio far greater than 125 percent through no fault of their own.
HARP 2.0 is now greatly expanded and includes the following changes:
- No loan-to-value limits: The 125 percent cut-off no longer exists. Homeowners are eligible to refinance regardless of how underwater they are.
- Elimination of appraisals and underwriting: The majority of homeowners will not have to endure either of these processes, leading to a much smoother process.
- Reduced fees: Risk-based fees charged to homeowners who refinance into shorter-term loans are reduced or eliminated entirely.
- Extended deadline: Homeowners are allowed to refinance under HARP 2.0 until December 31, 2013.
Who’s Eligible for HARP 2.0?
We know that HARP 2.0 has the potential to help a lot of people refinance, but there are still some hoops to jump through to be eligible:
- Fannie Mae or Freddie Mac must have acquired your loan on or before May 31, 2009.
- You cannot have missed a mortgage payment in the past 12 months.
- Your current loan-to-value ratio must be greater than 80 percent.
HARP 2.0 Isn’t the End …
While HARP 2.0 is a step in the right direction, it isn’t the final solution to the challenges underwater homeowners face. The current challenges facing the HARP 2.0 program include:
- Home equity loans are not addressed.
- Certain homeowners don’t qualify because of credit score or employment changes.
- Loans not currently held by Fannie Mae and Freddie Mac are ineligible.
There is talk about HARP 3.0, but there is no guarantee it will pass. Theoretically, HARP 3.0 would remove the Fannie Mae and Freddie Mac restriction, but it would also allow additional homeowners who hold “Alt-A” mortgages (a significant number of people) to take advantage of the program.
Additional people who may benefit from the program include homeowners who live in high-cost areas and have mortgages that originated for between $417,000 and $625,500, and self-employed individuals who used stated income to originate their mortgages but can now verify that income with their tax returns.
Written by Erin Everhart, New American Funding