UnHARPing: A New Opportunity For Mortgage Lenders?

BLOG VIEW: It was great while it lasted, but now the government’s Home Affordable Refinance Program (HARP) is coming to an end, making millions of borrowers good refinancing candidates in what Freddie Mac calls an “unHARPing.”

“HARP was designed to help homeowners who had financed before the mortgage meltdown, had good credit and were making their payments,” explains Rick Sharga, executive vice president of Ten-X.com, an online real estate marketplace. “These were people who played by the rules but could not refinance because real estate values in their communities had plummeted. HARP allowed upside-down borrowers to get new financing with low rates when no other options were open to them.”

Because of falling home values, existing loans could not be refinanced through private-sector lenders. According to the Federal Reserve, owner equity in 2005 amounted to $13.12 trillion, a figure that fell to $6.46 trillion by 2009. With HARP, an underwater owner could refinance, and some 3.4 million homeowners have taken advantage of the program to date.

HARP made refinancing possible for borrowers with good payments and solid credit – plus it did something else: It created an incentive to refinance. The Federal Housing Finance Agency says HARP borrowers could typically save about $200 a month. Over five years, that means an extra $12,000 in fresh cash for HARP borrowers.

HARP is not just for borrowers. Without HARP, there would have been more homes lost at the very time foreclosure activity was peaking – a bad deal for the lending system. And, just coincidentally, HARP was especially helpful in politically important but devastated areas, such as Florida, California and the Rust Belt.

The HARP Era Is Ending

All good things must end – and now that time has come for HARP. The program itself will shut down at the end of this year; no new applications will be accepted.

Only about 10% of existing HARP borrowers have refinanced, according to Freddie Mac, so there are a lot more who could emerge as refinancing candidates.

“With about 2 million active HARP refinance loans in the market today,” says Freddie Mac, “there is a substantial potential for refinance from these borrowers.”

The question is whether HARP borrowers are now strong enough to qualify for new financing. The answer is likely to be yes – and what follows are some reasons why.

Equity: Real estate owners are in much better shape today than they were five years ago. The Federal Reserve says residential equity went from $6.462 trillion in 2011 to $12.366 trillion in the third quarter of 2015. Many borrowers who were underwater just a few years ago now have significant equity, giving them a newfound ability to refinance outside HARP.

The catch is that although the news on the equity front has generally been good, it hasn’t been good everywhere. Though the number of seriously underwater homes is down 50% from 2012, the recovery has failed to reach millions of Americans. Figures from RealtyTrac show that 6.4 million U.S. properties were “seriously underwater” at the end of 2015 – situations in which mortgage debt was at least 25% higher than market value. The result is that although rising equity can help current HARP borrowers refinance out of the program to get better rates, still-underwater borrowers without HARP financing need to speak with lenders before New Year’s Eve or they will be unable to use the program. Either way, lenders should be able to help.

Mortgage debt: We can logically expect that many if not most HARP borrowers will only refinance after several years. As time passes, remaining principal balances decline, so there’s less to refinance. With smaller monthly payments for principal and interest, debt-to-income guidelines will be easier to meet.

Mortgage rates: The HARP program began in 2009, so there are many loans out there that have interest rates well above today’s levels – a real inducement to refinance.

Wage growth: Median incomes in the U.S. have generally risen in the past few years, growing from $51,425 in 2009 to $53,482 in 2014. More income means more ability to qualify for a new loan.

The bottom line is that HARP borrowers in big numbers will become a fertile market for refinancing products. Federal Housing Administration loans should be an easy option for many HARP households, while shorter-term loans, say 15- or 20-year mortgages, might also make sense, given today’s rates and smaller levels of debt.


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