Dan Green
Dan Green
Filed Under
HARP Mortgages

HARP 2.0 : Underwater Homeowners Need Fewer Loans Over 125% LTV

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HARP 2.0 mortgages completed by loan-to-value (LTV)

Two years ago, the Home Affordable Refinance Program (HARP) opened up for U.S. homeowners whose mortgages were "severely underwater". 

At the program's peak, loans for which loan-to-value (LTV) exceeded 125% accounted for more than 40 percent of all HARP loans closed. Today, such loans barely top 14% of total HARP closings.

The need for ultra-high LTV HARP loans is shrinking.

Get a personalized HARP rate quote here.

HARP : Refinancing For Underwater Homeowners

HARP is an acronym. It stands for Home Affordable Refinance Program. Sometimes called the "Obama Refi", HARP was launched in 2009 as part of that year's economic stimulus program.

At the time, mortgage rates had been dropping sharply. Meanwhile, home values were doing the same.

In places like Los Angeles, California; Miami, Florida; and Phoenix, Arizona, homeowners witnessed 30-year fixed rate mortgage rates dropping to the 4s. However, because these homeowners had little or no equity left in their properties, there was -- quite literally -- nothing they could do to benefit from low rates.

That's when HARP was first proposed.

As part of its economic stimulus programs, the government was promoting the idea that if underwater homeowners could just get access to a refinance, they would be able to lower their monthly mortgage payments, thereby increasing household cash flow, and boosting consumer spending which would help propel the U.S. economy recovery.

HARP mortgage guidelines instructed U.S. banks to ignore a homeowner's specific home equity for a refinance and, instead, to focus on a homeowner's other loan traits, such as its history of on-time mortgage payments.

Headlines read "Obama Waives Refi Requirements". U.S. homeowners jumped on the program.

HARP 2 : Removing 125% LTV Restrictions

HARP was originally meant to reach 7 million U.S. homeowners. However, through the program's first two years, it had failed to reach even one million households. The government determined that there were two key reasons for the shortfall.

The first reason HARP was falling short was because the government was asking banks to underwrite loans for the Home Affordable Refinance Program, but then holding them responsible for due diligence errors made on the loan prior to the refinance.

For example, if Wells Fargo was giving a HARP loan to an existing Bank of America customer, Wells Fargo would be accountable to Bank of America's original home loan approval, plus any errors, omissions, or traces of fraud which occurred on the original underwrite.

Rules like that will scare a bank so, as a result, few lenders gave HARP access beyond their existing customers base. These loans came to be known as "same-servicer" HARP loans. The lack of "cross-servicer" loans hindered HARP's progress.

The second reason HARP was falling short was because program guidelines restricted HARP loans to homes with LTVs of 125% LTV or less. This was restrictive to homeowners in hard-hit states such as Nevada and Florida whose negative-equity positions were much greater than 125% LTV. 

Some homeowners had LTVs as high as 300 percent.

So, in November 2011, as an effort to make HARP "better", the government re-released the Home Affordable Refinance Program as HARP 2.0.

The main changes for HARP 2.0 were two-fold :

  1. Indemnify new mortgage lender from errors made by original mortgage lender
  2. Remove the loan-to-value restrictions so 125% LTV was no longer a limit

The changes gave U.S. homeowners access to unlimited LTV loans which could be handled by any HARP-participating lender. Since the program update, HARP volume has tripled. More than 3 million HARP loans have closed since the program's inception.

The need for ultra-high LTV loans is waning, however.

Get a personalized HARP rate quote for your home.

HARP For LTVs Over 125% Lose Market Share

HARP 2.0 launched in November 2011 and, by June 2012, loans over 125 percent LTV accounted for more than 40% of total HARP volume.

This would be the peak for ultra-high LTV HARP loans; a function of pent-up demand, falling mortgage rates, and stagnant U.S. home prices.

Since June 2012, HARP loans over 125% have steadily lost market share, and are now fewer than one in 5 HARP loans closed. The drop since six months ago is palpable :

  • May 2013 : 18.6% of all HARP refinances were for LTVs over 125%
  • June 2013 : 17.5% of all HARP refinances were for LTVs over 125%
  • July 2013 : 17.0% of all HARP refinances were for LTVs over 125%
  • August 2013 : 16.7% of all HARP refinances were for LTVs over 125%
  • September 2013 : 15.8% of all HARP refinances were for LTVs over 125%
  • October 2013 : 14.2% of all HARP refinances were for LTVs over 125%

Demand for ultra-high LTV loans is decidedly lower as compared to just six months. Rising home values are diminishing the need for HARP loans over 125% LTV. The trend will likely continue through 2014, too.

The government says the HARP program will end December 31, 2015 -- but will we even need it? Will it take a HARP 3 to move the program forward?

Get HARP Mortgage Rates

The HARP mortgage program has 2 years left in its life. There's no rush to refinance. However, with mortgage rates near all-time lows and expected to rise through 2014, today's market conditions remain favorable for underwater and ultra-high LTV homeowners.

The typical HARP homeowner saves more than 25% on their mortgage payment monthly. See how HARP can help you. Get started with a rate quote. It's fast and free to get a quote.

Get a personalized HARP rate quote for your home.

About the Author

Dan Green is a mortgage market expert, providing over 10 years of direct-to-consumer advice. NMLS #1019791. You can also connect with Dan on Twitter and on Google+.

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