Many home owners watched helplessly as their homes values plunged an average of 34 percent below peak prices. In some states, home values plunged 50-60 percent before the real estate market began its current recovery. Many of these homeowners need to refinance their home loans to take advantage of low interest rates, reduce their monthly mortgage payments and enhance their financial stability.
Home owners who have underwater mortgage may be eligible to refinance under the Homes Affordable Refinance Program (HARP). The program, which has been around since April 2009, has been gone through several revisions.
Extension to Help More Home Owners
Once again, the deadline for participation has been extended too. Scheduled to expire on December 31, 2013, the HARP has been extend through December 31, 2015 to give more home owners the opportunity to apply for the
According to Edward J Demarco, the acting Director of the Federal Housing Finance Agency (FHFA) says that approximately 2.2 million home owners have refinanced their mortgages under HARP. This number falls far short of the 4 million or more homeowners the agency claimed would benefit from the program during it rollout four years ago.
To meet the initial eligibility requirements, borrowers must have a mortgage that is owned or guaranteed by one of the two secondary-market mortgage corporations-- Fannie Mae or Freddie Mac on or before May 31, 2009. Recent data reveal that 20% of homeowners who refinanced their Fannie Mae or Freddie Mac-insured mortgages in January did so under the HARP mortgage program.
The U.S. Congress authorized the creation of the Federal Housing Finance Agency, which serves as conservator over the two entities starting in late 2008.
The home must have a loan-to-value ratio that exceeds 80%. Approximately, 25% of the homes refinanced under the program in January had an LTV greater than 125%.
Most of the home owners who could possibly qualify under HARP have mortgages with interest rates somewhere near 5%. With mortgage rates in the range of 3.34 percent millions of homeowners could possibly qualify to realize a significant savings and enjoy lower monthly mortgage payments.
After revising the program again in late 2011-- redubbed “HARP 2.0-- the Obama Administration estimated that the average household could save an average of around $3,000 per year. Additional money in the pocket of borrowers will result in more spending for goods and services, which helps the U.S. economy.
According to mortgage-backed security analysts Matthew Carr and Chris Flanagan of Bank of America Merrill Lynch, there are approximately 2 million eligible borrowers who could benefit from refinancing their mortgages.
They also believe there is a possibility that despite the historic lows reached by mortgage interest rates they “could move lower and that organic refinancings could also remain elevated."
Here are some effects and considerations with the decision to extend HARP 2.0:
Relationship to Fed’s Bond Purchase Program
According to the March minutes of the Federal Open Market Committee meeting, the Fed intent to keep its bond buying program at least through next year and possibly into 2015, which is longer than originally anticipated by the market.
Currently, the Fed buys $85 billion in Treasuries and MBSs each month. A faction of FMOC members want to discontinue the program, especially if the struggling economy shows any sign of sustainable growth.
The Fed’s program works with the HARP extension in the following manner:
- Keep interest rates low enable more households to qualify to refinance
- Home values continue going up and creating home equity for borrowers
- More home owners qualify to refinance their mortgages
From December 2011 through February 2013, home values increased 11.6%. Some economists believe that when one considers the shortage of homes—[particularly in the price range most coveted by first-time home buyers and real estate investors, the demand for housing will result a price gain of 10 percent in 2013.
Eliminating Other Obstacles to Mortgage Financing
Another benefit of for continuing the HARP mortgage program for an additional two years is to allow time for the housing market and/or or policy makers to abolish what Fed Chairman Benjamin Bernanke describe as "barriers to refinancing blunt the transmission of monetary policy to the household sector," in a white paper submitted to Congress in 2012.
Bernanke ‘s statement makes reference to the tight credit standards that persisted after the 2008 financial meltdown making approval of mortgage origination and mortgage refinance for credit worthy borrowers a major impediment to helping financial strap homeowners and supporting the housing market recovery.
Subsequently, revisions in HARP 2.0 eliminated all loan-to-value requirements proof of income requirements; proof of asset requirements; minimum credit score requirements; and some home appraisals.
Nonetheless, challenges remain for homeowners and potential home buyers. For example, participation in HARP does not require borrowers to have a minimum credit score. However, banks have their own variations of the program and some institutions must incorporate state laws into the mix.
Presently, the only way around these sometimes slight differences that may cause a rejection is to approach another bank about refinancing. The Chairman went on to say, "Further attention to easing some of these obstacles could contribute to the gradual recovery in housing markets and thus help speed the overall economic recovery.”
Another hot point concerns the millions of homeowners with underwater mortgages and the issue of principal reductions.
Adding an additional two years to HARP 2.0 will undoubtedly increase the support for a HARP 3.0 mortgage program. The idea of HARP 3.0, which was broach in the last State of the Union Address by President Obama, would provide an opportunity for “every responsible homeowner” to refinance their mortgages and take advantage of low mortgage rates. The program will be called “myrefi”.