HARP Throws Life-Line to “Upside-Down” Homeowners

Many homeowners who are trying to refinance, but can’t because they are “upside-down” have just been thrown a life-line. The Home Affordable Refinance Program (HARP) has just been expanded from the present loan-to-value (LTV) of 105 to 125 percent. This increase is aimed at keeping more people in their homes and out of foreclosure or short-sale situations.

Previously, homeowners with an LTV greater than 105 percent could not refinance under HARP. This often lead to financial hardship and even foreclosure for many of those homeowners who saw their mortgage payments increase once their rate reset up.

With the LTV raised to 125 percent, many of those who did not previously qualify now do. Those who now qualify under the raised ceiling may be able to lower their mortgage payments and/or better budget their money with a new (lower) fixed mortgage rate. This should help keep more people in their homes.

There are some restrictions:

  • The loan mush be currently owned or guaranteed by Fannie Mae or Freddie Mac
  • The homeowner(s) must be current on their mortgage payments
  • The homeowner(s) must meet all HARP criteria

Here’s the official Federal Housing Finance Agency press release and fact sheet (click here if you don’t see the document below):

Fannie Freddie Raise Refi LTV to 125% 7-1-09

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16 Responses to HARP Throws Life-Line to “Upside-Down” Homeowners

  1. So the fix is to offer 125 percent LTV on homes…

    Isn’t this how we got into this mess we are in?

    Is it just me?

  2. Tony Arko says:

    This is not a lifeline, this is an anchor that will keep homeowners stuck in a home for about 12-17 years. Why? Because that is how long it will take the homeowners to get to break even on the principal amount of the new loan. Check out this post for proof. http://seattlebubble.com/blog/2009/07/02/125-refinance-pricing-you-in-for-a-decade-or-more/

  3. Yes, homeowners will be forced to stay in their home for ~12 to 17 years before they break even. But the other option for many is, “Screw it! I’m upside down and my interest rate is resetting upward by 2 points so I’m just going to turn in the keys, ruin my credit and add to the whole foreclosure mess we’re in.”

    If a homeowner can avoid foreclosure by staying put for an extra 4 to 9 years and getting into a fixed-rate mortgage that keeps their monthly mortgage payment more steady and possibly even lowers it, this program can very much be a “life line.”

    If a homeowner would rather take the short-sale or foreclosure route and be able to move whenever they want to, then yes, this is an anchor.

    And if someone sees foreclosure as a way out to being “upside down” today, they’ll probably have no problem taking a fixed-rate mortgage and lowering their monthly payments now and then going into foreclosure 3, 5 or 8.5 years down the road when they feel like moving. Though these types of homeowners are not the intended audience, HARP’s new guidelines just bought them time and money – I’d say that’s a life-line.

  4. Tony Arko says:

    A negative amortization loan is still an negative amortization loan even if you call it a loan modification, mortgage relief program or a life line. Kicking the can down the road is not the answer. It is the answer that banks want homeowners to chose. Just like they wanted homeowners to choose negative am loans in the first place.

    But it is probably not a smart decision. There are much better options that are part of our legal system that will allow Americans to have a future. And companies such as GM and Chrysler and General Growth Properties have taken advantage of these laws to get out from under huge debt loads that threatened their futures. And homeowners should think about those laws that were made just for these types of situations. But they need to take their medicine now while the banks are still willing to hand out the medication. A foreclosure and a bankruptcy will only effect a current homeowner for seven years not 12-17 years. And during the seven years that they will have to rent (at at monthly amount of 60-80% of a mortgage payment) they can save for their retirement or for their children’s college instead of sending it to banks that already have billions of our taxpayer dollars.

    Don’t call it a lifeline, call it what it is – another horrible solution to a terrible situation.

  5. HARP loans are definitely NOT neg am loans; I think you’re confusing the HARP program with the Home Affordable Modification program, but those are two completely separate things.

  6. The post over at Seattle Bubble is a bit misleading and one commenter said it best,

    “I’m fairly certain this isn’t a program that allows them to borrow more than what they do already (subject maybe to loan costs), so it’s not locking them into anything they aren’t already locked into. It’s just allowing them to lower their payments.”

    If they were allowed to borrow more than what they currently owned, that would not be good and that would be horrible solution. But HARP does not allow people to borrow 125% of their home value unless they owe that much already. It is a refinance – not a new purchase nor “cash out.”

    And they’re already “stuck” in their home whether they refinance or stay in their current mortgage. Their property will still be worth $X, they will still owe $Y on their mortgage and their LTV will still be at 125% whether they refinance through HARP or not.

    As Sweth said, this is not the Home Affordable Modification program nor a neg am loan. This is simply a way to refinance the same amount you currently owe into a fixed rate mortgage at a potentially lower interest rate.

  7. aio-holic says:

    I’m still don’t really understand with it.

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  9. Sam Snead says:

    Some people want to stay in their homes even though they owe more than they are worth. Helping them re-finance at a lower payment and prevent forclosure is a smart move. It is a win / win for everybody. Who knows maybe the market will recover enough for some of these folks to see some equity in their houses a few years down the road. It will also help reduce the inventory of forclosed and distressed properties so that we may (eventually) get back to a normal market.

  10. Karen Morris says:

    So, here is the dilemma. Unless the lender currently services the mortgage that will ultimately be refinanced, what is the assurance that lenders can salvage potentially borderline lines that they will not be facing buy back from agencies. For example, a homeowner has a GMAC mortgage and FAMC LO wants to refinance because they are offering more competitive terms than GMAC. While agency will insure the loan, there remain buy back provisions in the delivery process and therefore why would FAMC, as a lender, want to incur that risk when it was only a modest loan going in? The climate, while improving, is still in a tenous state and much of what caused problems to begin with are still apparent in the market. The problem was not essentially the decline in property values, but rather the circumstances which caused the default or payment stress to begin with – commissioned and self-employed earnings declining, adjustint payments for low rate and negative amortizing mortgages, and job losses.

  11. @Sam: many economists would argue that these measures aren’t reducing the inventory of distressed properties significantly, but are instead just spreading them out over a longer period, in which case letting them go to foreclosure sooner rather than later might actually be better for a market recovery. (That presumes that the larger-faster scenario doesn’t cross some as-yet-undefined tipping point where it gets so bad that it just *can’t* get better.)

    @Karen: the stated hope of the HARP program *is* to address one of the root causes–people whose payments adjusted beyond their means to pay, but who otherwise are stable debtors who could carry a reasonable debt load but who can’t currently make their debt loan more reasonable because they are underwater. As for why the new lender would take on the additional risk, the answer as always has to be potential profit. Are you on the retail side at FAMC? I’m a broker, and on the wholesale side at least FAMC is offering the same pricing for Refi Plus as for other conventional loans, implying that they don’t see any extra risk as long as the U/W guidelines are being met.

  12. Sam Snead says:

    Sweth– I just believe anything we can do to try and keep these people in their homes and paying their mortgages we should try to do. I think this is far better than Banks doing short sales . We all ultimately pay the price for banks losing money . Ironic isn’t it that it all falls back on the taxpayer. I think both the banks and the homeowners have responsibilities and if the homeowner is willing to stay in the house the banks should bend over backwards to try and work with them. I don’t think anything is going to be quick and easy at this point. I understand what the economist are saying. If all the toxic assets were off the books today I think we would still have a sluggish housing market because of the overall economic conditions. I think the real underlying problem is a lack of confidence and the fact that a large number of people don’t have jobs or fear they may lose the job they have. The most important thing we can do for the housing market is to somehow stress to all our politicians that jobs,jobs,jobs is the most important issue we are faced with in this country. If people have dependable jobs they will buy homes.

  13. tom garcia says:

    Sounds to me like the same justifications which have been proposed for everyone to realize the American dream of home ownership and to remain in a home they cannot afford. When will NAR leadership (and VAR) acknowledge that many people are in over their head in debt and tax payers (including many Realtors), should not have to bear the cost of bailing them out. Let’s see an end to bailing out the water of a sinking ship!

  14. Tony Arko says:

    There will always be two solutions to the problem and each side will think their answer is right. One way is to put as many people into homes as possible (even if they do not qualify under normal lending practices) and when it goes completely wrong make them dependent on the government (using tax payers money, taxpayers that didn’t buy too much house and were not irresponsible) to bail them out thereby keeping the government in control of the marketplace. The other way is to let the marketplace work on its own by not forcing institutions to lend to unqualified people as a mandate (just so they can lend more to qualified people). Forcing lenders and GSEs to loan money to obviously risky parties that were poor candidates for home ownership was the governments way (and NARs way) is what created the subprime market. Up until these mandates to lend to the subprime market existed, the subprime borrowers were known as renters.

  15. In the Sacramento region where I live, home prices have fallen 52.5% over the past 3 years (source: Metrolist MLS and Trendgraphix, Inc.) That means that if you purchased an average-priced home here in ’06 at $425k, it would now be worth just over $204,000! Even those of us who purchased a home responsibly are upside-down and dangling in the wind. If you have a legitimate reason to sell your home right now (relocation, family circumstances etc..), it’s likely that you will need to do so at significant loss. It’s good to see that the government has a plan to support those home-owners who are current on their mortgage but it’s likely that even an LTV of 125% isn’t enough in many hard-hit areas.

  16. D,

    Thanks for posting this, as much as I try to stay up-to-date I missed this one. I’ve read all the comments and my thought is that anytime more options are brought to the table; the better the chance we have of finding the right combination for people. I think the argument that this may be a taxpayer burden may have some virtue; but doing nothing hasn’t worked. The taxpayer is already under a burden, so giving another option that may help, doesn’t bother me.

    After the bazillion dollar “bail out” our next generations are already under burden, this isn’t going to make that go away.

    As far as making the argument that this hurts good buyers who purchased responsibly, I think we’re beyond making that distinction. I could argue that anyone who bought in the past five years was not making a good decision, if we used hind-sight as our benchmark.

    We bought a foreclosure at a great price about 18 months ago, it was sold for well under appraisal and $125,000 less than it was bought for two years prior. Two doors down from us a neighbor just put their home up for sale for HALF of what we just bought our home for. Should it sell, it would make our purchase decision look poor.

    With HVCC and USPAP making appraisers record distressed sales, I don’t think we can judge someone as a good or bad buyer any longer.

    I am for this attempt. If in the process Fannie/Freddie finds this isn’t working; we have to hope they will make the necessary changes to make it better.

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