Home Affordable Refinance Program (HARP)

The Home Affordable Refinance Program (HARP) was a federal government initiative launched in March 2009 to help homeowners who were underwater or near-underwater on their mortgages refinance their loans. The program was designed to provide financial stability to homeowners struggling to make their mortgage payments due to falling home prices, which left many owing more on their mortgages than their homes were worth.

Background and Purpose

In the wake of the 2008 financial crisis, the US housing market faced an unprecedented collapse, resulting in millions of homeowners finding themselves with mortgages that exceeded the value of their homes. This phenomenon is known as being “underwater” or “upside-down” on a mortgage. Being underwater limits homeowners’ options to refinance their mortgages at lower interest rates, as traditional refinancing requires a certain loan-to-value ratio (LTV).

To address this, the Federal Housing Finance Agency (FHFA) in conjunction with the US Treasury Department and government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac developed HARP. The main goal was to enable responsible homeowners to secure more affordable and sustainable mortgages despite having little to no equity in their homes.

Eligibility Criteria

Homeowners needed to meet specific criteria to qualify for HARP:

  1. Loan Origination Date: The mortgage must have been originated on or before May 31, 2009.
  2. Ownership: The loan must be owned or guaranteed by Fannie Mae or Freddie Mac.
  3. Payment History: Homeowners must have a good payment history, with no late payments in the last six months and no more than one late payment in the last 12 months.
  4. Loan-to-Value Ratio (LTV): Initially, HARP was designed for homeowners with LTV ratios greater than 80%, though later revisions removed maximum LTV limits.
  5. Benefit from Refinance: Homeowners must demonstrate that the refinance would provide an identifiable benefit, such as a reduction in the monthly mortgage payment, a more stable mortgage product, or removal of mortgage insurance.

Program Evolution

HARP went through multiple revisions to expand its reach and effectiveness:

Impact and Outcome

HARP provided significant assistance to millions of homeowners. According to the FHFA, HARP helped over 3.4 million homeowners refinance their mortgages. The program was particularly beneficial in stabilizing the housing market, reducing the risk of foreclosures, and allowing homeowners to obtain lower interest rates, resulting in substantial savings on mortgage payments.

Expiration and Succession

HARP was initially set to expire on December 31, 2013, but due to its success and ongoing need, it was extended several times, ultimately expiring on December 31, 2018. Post-HARP, the FHFA introduced new streamlined refinance programs aimed at continuing to provide refinancing options for high LTV borrowers:

Technical and Practical Aspects

Mortgage Refinancing Mechanics

Refinancing a mortgage involves taking out a new loan to pay off an existing one. This can be achieved through a rate-and-term refinance or cash-out refinance. HARP focused on rate-and-term refinancing, enabling homeowners to take advantage of lower interest rates or move to more favorable mortgage terms.

Rate-and-term refinance: Changes the interest rate, loan term, or both, without altering the loan balance. Cash-out refinance: Allows homeowners to take out a new mortgage for more than they owe on their existing loan, pocketing the difference as cash.

Interest Rate Reduction

One of the key benefits of HARP was the ability to secure a lower interest rate, which directly reduced monthly mortgage payments. Even a small reduction in interest rates could lead to substantial savings over the life of the loan.

Mortgage Insurance

For homeowners whose original loans had private mortgage insurance (PMI), HARP accommodations allowed them to carry over the existing PMI to the new loan without incurring additional costs or complications.

Case Studies and Real-World Examples

Case Study 1: Middle-Income Homeowner

Mr. and Mrs. Johnson purchased their home in 2007 with a 30-year fixed-rate mortgage at a 6.5% interest rate. By 2010, their house value had decreased, leaving them with a 110% LTV. Despite owning a well-maintained home and making timely payments, they were unable to refinance through traditional means. With HARP 2.0, they secured a 4% fixed-rate mortgage, reducing their monthly payments by $300.

Case Study 2: Coastal Region Homeowner

Ms. Smith owned a property in a coastal region affected by falling property values. Her LTV was 145%, preventing her from obtaining refinancing. HARP enabled her to refinance her mortgage from an ARM (adjustable-rate mortgage) with a high risk of rising payments to a low fixed-rate mortgage, providing long-term financial stability and avoiding potential future payment spikes.

Conclusion

The Home Affordable Refinance Program (HARP) was an essential tool in the government’s arsenal to combat the fallout from the 2008 financial crisis. By enabling millions of homeowners to refinance their underwater mortgages, it provided critical relief, helping to stabilize the housing market, reduce the risk of foreclosure, and offer financial stability to countless families. Although the program has ended, its legacy continues to influence current refinancing options through the programs that succeeded it.