HARP Loans: What They Were and What Replaced Them

When real estate values crashed during the Great Recession, many homeowners found themselves in a difficult situation: they owed more on their mortgages than their homes were worth. This situation prevented borrowers from refinancing. To address the problem, the federal government created the HARP loan. Unfortunately, the program ended in 2018, but there are alternatives. As such, we’ll use this article to provide background on the HARP loan and options currently available to borrowers.

Underwater Mortgages and the Challenge of Refinancing

If you listened to the news or owned a home during the Great Recession, you likely heard the term “underwater mortgage” frequently. In simple terms, this means that a mortgage balance exceeds the home’s current value. For instance, say you owe $250,000 on your mortgage, but the home is worth $200,000. In this situation, you’d be underwater on your mortgage, as you owe more than the home is worth. Normally, borrowers become underwater due to a widespread collapse in housing prices, as happened during the Great Recession.

Being underwater on a mortgage makes refinancing your loan difficult – if not impossible. To provide a mortgage, lenders want to ensure the associated home serves as full collateral for the loan. That is, if you default on the mortgage, the bank could seize and resell the home to recoup the outstanding loan balance.

But if your home is worth less than the current mortgage balance, refinancing into a new loan would leave lenders with insufficient collateral. Continuing the above example, most lenders wouldn’t refinance that $250,000 loan into a new $250,000 mortgage knowing that the underlying property is only worth $200,000. For this reason, underwater borrowers struggle to take advantage of lower interest rates, as most lenders won’t approve refinancing in these situations.

What Was the HARP Loan Program?

Administered by the Federal Housing Finance Agency, the government established HARP in April 2009. The program provided borrowers with loan-to-value (LTV) ratios of greater than 80% a refinance option to take advantage of lower interest rates. For instance, say your home was worth $200,000, an 80% or greater LTV would mean you had a mortgage of $160,000 or greater on that home ($200,000 value x 80% LTV). Traditional lenders typically wouldn’t refinance loans with such a high LTV, so HARP provided a welcome alternative for these borrowers.

In its original form, HARP set an LTV maximum of 105%. To reach more borrowers, the government then increased this ceiling to 125%. By October 2011, the government completely removed the LTV limit for HARP loans, meaning any borrower could qualify, regardless of how underwater he or she was on a mortgage.

During the program’s existence, more than 3 million borrowers refinanced their mortgages through HARP. Unfortunately, though, the program expired Dec. 31, 2018. Consequently, borrowers who are currently underwater on their mortgages need to look to the following HARP loan alternatives.

HARP Loan Alternative #1: Fannie Mae High LTV Refinance Option

To fill the HARP gap, Fannie Mae created its High LTV Refinance Option. This program is tailored for borrowers who A) make timely mortgage payments, but B) have an LTV high enough to disqualify them from traditional refinance options. In other words, the program serves reliable borrowers who have been harmed by economic forces beyond their control.

To qualify for this program, borrowers must be current on their mortgage payments and have no 30-day delinquencies over the past six months. Related, borrowers can have no more than one 30-day delinquency over the past year and no delinquencies greater than 30 days.

Furthermore, borrowers must receive one of the following benefits from a refinance to qualify for the Fannie Mae program:

•  Lower principal and interest payment
•  A shorter loan amortization term (e.g., refinance from a 30-year to a 15-year loan)
•  A lower interest rate
•  A refinance from an adjustable-rate to a fixed-rate mortgage

HARP Loan Alternative #2: Freddie Mac Enhanced Relief Refinance Mortgage

The next major HARP alternative applies to Freddie Mac borrowers. Similar to the Fannie Mae product, Freddie Mac’s Enhanced Relief Refinance Mortgage is designed for borrowers who A) make timely mortgage payments, but B) have an LTV that disqualifies them from traditional refinance options.

For borrowers using this program to refinance into a fixed-rate mortgage, there is no maximum LTV. This provides tremendous flexibility for underwater borrowers to take advantage of lower interest rates. However, borrowers refinancing into an adjustable-rate mortgage face a 105% maximum LTV.

HARP Loan Alternative #3: Short Sale as an Alternative to Refinancing

This final option is not a refinance option, per se. While both of the above options can help borrowers lower their interest rates, neither reduces the actual loan balance. Rather, with fees, borrowers may end up with an even larger loan balance. As such, neither program addresses the underlying problem of owing more on your home than it’s worth.

Accordingly, some borrowers view short sales as a better alternative. With a short sale, borrowers must A) have no equity in their homes, and B) be facing financial hardship. If so, they can approach a bank to seek a short sale. Essentially, the bank recognizes that, because the home’s value has decreased, it cannot recover its entire loan balance through foreclosure. Instead, it agrees with the borrower to accept a lesser amount to satisfy the entire outstanding loan balance.

Short sales are not easy processes, as the bank must sign off on any purchase offer. Additionally, homeowners receive no cash from the sale, as all proceeds are used to pay off the loan. But, from a credit report perspective, short sales tend to reflect less poorly than a loan foreclosure or bankruptcy. This approach will still adversely affect your credit report for at least 7 years, so borrowers should seriously weigh alternatives before pursuing a short sale.

Final Thoughts

Borrowers who are underwater on their mortgages often struggle to find refinance options to take advantage of lower interest rates. And, this problem was exacerbated when the HARP loan expired at the end of 2018. Fortunately, Fannie Mae and Freddie Mac have created HARP loan alternatives, providing qualifying underwater borrowers a refinance option.