What is Wrong With the Home Affordable Refinance Program (HARP)?
Find out how to get your Home Affordable Refinance Program application approved
Question: What is wrong with HARP?
A reader asks: "We tried to get a loan modification, but Wells Fargo said we did not qualify. We have a mortgage that is about to reset, going from an interest only loan to fully amortized in six months. There is no way we can afford that payment. We don't want to sell on a short sale because we don't want our daughter to change schools. I'm hearing we can pay off our loan with a new loan under President Obama's refinance program. But I've been down the path of hoping, crossing our fingers and losing sleep over this mortgage for the past five years; I don't know if I can take it anymore. What is wrong with the Home Affordable Refinance Program? Should we do it?"
Answer: HARP guidelines are exceedingly lenient. In short, the government offers two options through Making Home Affordable. The two options are:
The basic difference between the two programs is that loan modifications are for people who have a financial hardship, and HARP is for sellers who don't qualify for a loan modification because they have no financial hardship.
How to Qualify for HARP
HARP qualifying standards are relatively straightforward as follows:
- Your mortgage must be owned by Fannie Mae or Freddie Mac. Other types of loans do not qualify for HARP. You can look up your loan online to see if it is held by Fannie Mae or Freddie Mac by going to the loan lookup tools on the Making Home Affordable website.
- Your loan must have originated prior to June 1, 2009.
- Your loan-to-value ratio must exceed 80 percent.
- You must be current on your payments, with no more than one late payment in the past 12 months.
- Except for a small window that is excluded, you can't have used the HARP in the past.
The main reasons a homeowner would apply for HARP are because the homeowner wants to keep the home and cannot get a loan modification.
Homeowners who would prefer to do a short sale generally do not apply for HARP.
- The refinance program has no limit on the amount of loan if your existing loan has a fixed rate. There is no cap.
- There is a small, limited, cash-out incentive. Generally only closing costs can be added to your loan to increase its balance.
- You can remove a borrower from the exisiting loan if the remaining borrower can prove a steady payment history. This would work for a qualifying divorcing couple.
- You can add a borrower to the loan, providing the new borrower can qualify.
- You can refinance if you've filed bankruptcy as long as the bankruptcy was discharged more than 12 months ago, and you've been staying current on your mortgage payment since.
- With the exception of one type of HARP program, a minimum credit score and debt ratio is not required.
HARP Problems Explained
The same problem that plagues loan modification programs plagues HARP. For starters, not enough people qualify for the assistance, meaning the guidelines don't fit most people.
- The biggest problem is that the program does not reduce the principal balance. In fact, it makes the principal balance even bigger.
- You will continue to pay mortgage insurance if you owe it now. Although your payment might decline due to a lower interest rate, your payment might also go up, too. However, Fannie Mae guidelines state if you did not have mortgage insurance before, you will not now.
- You cannot payoff or refinance a fixed-rate second loan or home equity loan through HARP. The best thing you can do is get the second lender to subordinate, meaning to remain in second position. But there is little incentive for a second lender to agree. Why would a second lender want to jeopardize its position and sink into the well of no equity even further?
- You might change your type of loan to recourse. Laws vary by state. In California, for example, sellers who refinance are changing the terms of their loans from purchase money to hard money. Hard money can subject a borrower to a judgment in the event of default.
Generally speaking, purchase money loans carry no recourse in California. If you were to go through foreclosure down the road, if your loans remained purchase money, you could be protected from personal liability in California. Fallout from a refinance, such as gaining the right to pursue a deficiency judgment in the event of default, can be a big plus for banks and a bad thing for homeowners.
Short Sale vs. HARP
Under HARP, in two years, your home might still underwater and worth less than you owe. Sellers who arrange short sales can often qualify to buy a home in two to three years. So, they essentially trade an underwater home for a home just like it but with a much smaller mortgage -- except they rent for two years first. At the end of two years, a former short seller can have the same home but with equity.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.