How HARP 3.0 Could Help with Underwater Mortgages

HARP 3.0- 150x150Originally, the Home Affordable Refinance Program (HARP) was created to help responsible homeowners that were current on their mortgages but owed more than the market value of their homes. With the next installment, HARP 2.0 waived the loan-to-value requirements and provided more affordable mortgage refinancing solutions to more than one million U.S. households. HARP 3.0, which has been introduced as a bill but has not passed as of yet, would allow all homeowners whose mortgages are not backed by Freddie Mac or Fannie Mae to refinance their underwater properties. The new and improved program would offer much needed assistance to more homeowners than previous installments of the HARP program.

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Homeowners Who Would Benefit from HARP 3.0

  • A self-employed homeowner who borrowed their original mortgage from their stated income but now wants to verify their income through federal tax returns
  • A jumbo mortgage homeowner who lives in a high-cost area and whose original mortgage was anywhere between $417,000 and $625,000
  • A subprime borrower who has responsibly met their current mortgage terms and can accurately verify all of their income and assets
  • A wage earner who used their stated income or stated asset mortgage for convenience reasons
  • A prime borrower who used a subprime mortgage because it was relatively cheaper in comparison to a conforming mortgage
  • An Alt-A borrower who has tremendously improved their low FICO scores from the mortgage origination date

Proposed Changes to HARP Program with HARP 3.0

  • Eliminating all upfront fees and appraisal costs
  • Improving the marketplace competition since it requires the same underwriting standards for both servicers and non-servicers
  • Penalizing mortgage insurance providers and second lien holders who try to prevent homeowners from refinancing their first mortgages
  • Streamlining the refinance process by removing the requirement of providing employment or income documentation
  • Extending the streamlined refinancing provided under HARP 2.0 to GSE borrowers having loans that took effect prior to June 1, 2010. This is an improvement from the HARP 2.0 eligibility guidelines that restricts borrowers with Freddie Mac or Fannie Mae loans closed before June 1, 2009

Improvements to HARP Program

  • Lower monthly repayments. HARP 3.0 calls for lower mortgage rates for borrowers- under the 4 percent rate that reigned in 2012. Households would save around 30 to 40 percent through mortgage refinancing at these lower rates. When announcing the program in January of last year, President Obama also said that it would enable homeowners to save about $250 per month on the principal.
  • Ease in refinancing. The program would eliminate the tendency of some lenders denying borrowers of nonconventional loans for refinance plans. President Obama pushed for new guidelines before his reelection that would enable a homeowner with an underwater mortgage to modify their loan program in order to suit their financial situation.
  • Fewer requirements to qualify. Any underwater homeowner who is current on their existing mortgage with no other residential property could choose between a 30-year fixed rate mortgage at 5 percent and a 15-year fixed rate mortgage at 4 percent. All types of loans qualify. It does not have to be secured by Freddie Mac or Fannie Mae, nor does it have to be originated before May 31, 2009.
  • Fewer foreclosures. Underwater homeowners risk foreclosure in their current mortgage programs. However, HARP 3.0 would loosen the grip of those programs, thus enabling more homeowners to qualify. This would also reduce the number of foreclosures and stimulate growth in the economy.

The bill was presented to no avail in 2012, but was reintroduced by Democratic senators in early 2013. With significant support from housing and related industry heavyweights like National Association of Home Builders and Mortgage Bankers Association, as well as a Democratic-controlled Senate, the bill has a very good chance of moving forward.

How to Refinance An Underwater Mortgage Loan

iStock_000020697947XSmall-150x150The last few years of economic upheaval in the U.S. housing market have left some eleven million homeowners “underwater”—owing more money than their homes are currently worth. When the remaining principle on the mortgage is higher than the assessed value of the home, it becomes exceedingly challenging to refinance the loan.

Banks and lenders are looking for collateral to secure a new loan, and in the case of a mortgage refinance, the collateral traditionally takes the form of equity in the home itself. Most banks require enough equity to equal twenty percent of the proposed loan, but of course an underwater loan has zero equity to offer. To help you deal with an underwater mortgage, take a look at the HAMP and HARP programs.

The Home Affordable Refinance Program (HARP)

Certain underwater loans qualify for refinancing help from the federal government, through the Home Affordable Refinance Program (HARP). Those who qualify for this refinance might slash three or four hundred dollars per month from their mortgage payments. Needless to say, a decrease of that amount could make all the difference in being able to keep current on mortgage payments.

However, the qualification parameters for this refinancing option are rather restrictive. First of all, the homeowner must be entirely up to date with the mortgage payments. There must be no more than one missed payment in the previous year, and the last six months must be paid in full. These requirements, of course, eliminate any homeowner who is already on the road to home foreclosure. Arguably, the people who most need assistance are automatically disqualified from this particular program.

If the homeowner does meet this first requirement, there is a second condition that also must be met. The mortgage must be held by either Freddie Mac or Fannie Mae. Application details can be found on the government’s HARP website.

The Home Affordable Modification Program

Homeowners whose payment history disqualifies them from HARP aid might still find relief in another federal program; the Home Affordable Modification Program (HAMP) has less restrictive parameters. A homeowner with an underwater mortgage and missed payments can apply for this assistance if their mortgage is held by Freddie Mac or Fannie Mae, or by another lender who has signed on with the HAMP offer.

A homeowner who is unsure of who holds the mortgage can place a call to their lender and inquire whether they are participants in the government’s HAMP agreement. The homeowner must provide documentation that shows a financial hardship and proves the ability to make payments—and therefore the mortgage itself—is under threat.

The HAMP approach is not an actual refinance; instead, it alters the terms of the existing contract. The new terms can provide reduced payments for as long a period as five years. After five years, the monthly payments may increase again, but the increase is restricted to one percent a year, and will be capped when it reaches whatever was the market rate when the HAMP agreement was signed and enacted.