Home Affordable Refinance Program: A Lifebuoy for Underwater Homeowners

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Editor’s Note: This post was written by Vince Kasperick, founder and CEO of AimLoan.com, and republished here with permission.

A front page article in the March 3 edition of the Wall Street Journal discussed the paradox that mortgage rates are at half-century lows and yet millions of Americans have not yet refinanced. Last year, refinance volume reached $1.2 trillion, including 4.2 million homeowners who refinanced their Fannie Mae and Freddie Mac mortgages. Yet, 37% of borrowers with 30-year conforming fixed-rate mortgages – who collectively hold another $1.2 trillion of mortgages – have yet to refinance, even though their rates are 6% or higher, while current refinance rates are below 5%.

While there has been much publicity about the Home Affordable Modification Program (HAMP), designed to help homeowners in risk of default, there has been very little written about the Home Affordable Refinance Program (HARP), designed for homeowners who have continued to pay their mortgage on time, but whose property values have fallen through no fault of their own. Both programs are offered by Fannie Mae and Freddie Mac, the now-government-owned housing giants that finance the vast majority of mortgages in America and package the loans into mortgage-backed securities. Following are the key guidelines for HARP refinances:

  • The loan being refinanced must be held by Fannie Mae or Freddie Mac. Most mortgages with balances below $417,000 are, even though they are serviced by a bank or mortgage company. To find out where your mortgage ended up, contact your current servicer or visit www.makinghomeaffordable.gov.
  • The refinanced mortgage balance must be no more than 125% of the property value.
  • The borrower must have good credit and the ability to document their income.
  • Second mortgages or Home Equity Lines of Credit may not be refinanced into the new loan. However, they may be subordinated and remain in place as long as the combined balance of the loans is no more than 125% of the home’s value.
  • Closing costs may be rolled into the new loan.
  • If the existing mortgage does not have Private Mortgage Insurance (PMI), the new loan will not require PMI. If the existing mortgage has PMI, the policy will transfer to the new loan.
  • Primary residences, second homes and rental properties are all eligible.

So why are so many homeowners unaware of this refinancing option? Unfortunately, the biggest banks in the country are limiting HARP refinances to mortgages they currently service. They are not willing to open the program up to new customers because they believe this would expose them to risk currently held by another lender. They understand that the loans can be sold to Fannie Mae and Freddie Mac, but are worried that Fannie and Freddie will require them to repurchase the mortgages if they go into default in the future. This is a false fear! As long as the mortgages are underwritten to Fannie/Freddie guidelines, the loan sales are non-recourse and the lender assumes minimal risk.

Fortunately, there are a number of midsize mortgage bankers that fully embrace this initiative, offering HARP refinances to existing as well as new customers. By competitively shopping multiple lenders, homeowners can ensure they are getting the best possible HARP refinance rate. To find a participating lender, visit one of the leading online mortgage rate surveys. Although these rate surveys do not currently post rates for HARP, your objective is to identify lenders that offer competitive rates. A half hour on the phone will then give you several HARP lenders to choose from.

Lowering mortgage rates for the vast majority of Americans who continue to honor their mortgage obligations is good for our homeowners and our country. The borrowers benefit by improving net spendable income and our economy benefits by the marginal propensity to spend. The 4.2 million homeowners who refinanced their mortgages last year are saving on average $2,600 annually. Refinancing the remaining high rate mortgages will provide an enormous boost to our economic recovery and cost taxpayers nothing. That’s an economic stimulus package we can all support!

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Comments & discussion

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  • JS

    Very informational. Sounds like everyone is being cautious and everyone is affected by it.

  • http://www.ditech.com/ Ditech Refinance

    Even with the help of HARP guidelines, refinancing does have a few obstacles, such as credit and debt ratios, which has to include subordinate loan payments and the need for sufficient income. Appraisals are another issue that can derail the loan to value.

  • InceptingReality

    Thank you for the info! very useful!