Understanding HARP’s stumbling blocks will increase your successby Tim Manni
In an effort to help the readers of this blog gain a better understanding into the struggles homeowners have experienced via the HARP program, I asked mortgage professional Jim Campbell to share some ways homeowners can increase their chances at success. Below is a guest post written by Mr. Campbell:
Since the creation of the Home Affordable Refinance Program (HARP) in 2009, millions of people have tried to refinance with the hope of lowering their mortgage payment. However, only about 200,000 homeowners have refinanced through HARP. So why does it work for some but not others? I’m going to share an inside perspective on the challenges people run into, to give some insight into what can be done to increase your odds of success.
First, let’s clarify what makes a refinance a HARP refinance. The HARP program only applies to loans that are owned or guaranteed by Fannie Mae or Freddie Mac. You can find out if your loan is owned or guaranteed by the GSEs by using the loan lookup tools here: http://www.makinghomeaffordable.gov/get-assistance/loan-look-up/Pages/default.aspx.
The vast majority of mortgages, including HARP loans, follow Fannie Mae or Freddie Mac approval guidelines. Hopeful refinancers will need to qualify based on credit history and a verified ability to repay. The difference with a HARP loan is that Fannie and Freddie have loosened the approval guidelines to help people who have experienced a decline in their home’s value.
LTV, TLTV ratios
HARP loan guidelines allow for loan-to-value (LTV) ratios up to 125 percent. In addition, HARP loans do not require monthly mortgage insurance, which is normally required when the LTV exceeds 80 percent. Let’s look at an example:
Sally homeowner purchased her home five years ago for $200,000 and put 10 percent down. She took out an interest-only first mortgage for $180,000, and her LTV was 90 percent. Since then, she took out a home equity loan for $20,000 to buy a car. The total amount she owes today is $200,000. However, because of several foreclosure sales in Sally’s neighborhood, today her home appraised for only $150,000! Does she qualify for a HARP refi?
The quick answer is yes. Her LTV ratio is 120 percent ($180,000 balance divided by $150,000 value), which is within the 125 percent maximum. Her home equity second mortgage of $20,000 increases the total loan-to-value (TLTV) to 133%, but that’s OK because there is no defined HARP limit on TLTV. Looks like all green lights so far, right? However, there are additional HARP rules and varying rules with each lender that make this scenario difficult.
Although the HARP rules allow up to 125 percent LTV, very few lenders go up to the maximum. Others cap the maximum LTV at 105 percent, or 100 percent, etc. To make matters worse, not all lenders offer the Freddie Mac program, and only have the Fannie Mae version of HARP. So, homeowners who only talk to their current lenders may not have success. If the original loan didn’t require private mortgage insurance (PMI), you may be better served going to a broker who is familiar with and has access to several lender options.
Second mortgages have been a barrier because a HARP loan can’t pay off a second mortgage, so it must be re-subordinated. In our example above, Sally’s second mortgage lender has to agree to be in a subordinate lien position behind the new first mortgage. Initially when HARP rolled out, many second mortgage holders would refuse to re-subordinate behind the new HARP loan if the TLTV was outside their current guidelines. Fortunately, many have come to the realization that allowing the borrower to refinance makes it easier for them to afford their payments, and therefore lessens the risk of default. Although subordinations still occasionally get declined for TLTV depending on who holds the second mortgage, the situation has improved dramatically. An experienced HARP provider can tell you which second mortgage lenders have been approving high TLTVs.
In our example, Sally’s original loan was at 90% LTV, and therefore required PMI. When the loan being refinanced has PMI, HARP rules require that the refinance must be done through the current lender. This means a broker will not be able to help you. In addition, the original mortgage insurance provider must agree to insure the new loan. As a result, loans with PMI on them are more difficult to refinance under HARP because mortgage insurers have been wary of writing policies for homeowners who may be underwater or in some other form of financial trouble.
Although the program has limitations, HARP continues to help families save money on their mortgage. The program was extended through June 2011, so it’s not too late to take advantage of today’s low mortgage rates.
Jim Campbell is a licensed mortgage professional in Illinois. He can be reached at Aspen Mortgage, Naperville, 630-983-3600 or via email at firstname.lastname@example.org.