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Fred W. Holland

The Obama Homeowner Affordability Refinance Plan  (HARP)

In February, 2009, President Obama unveiled his plan to help stabilize the housing market and keep millions of borrowers in their homes with the passage of a $75 billion foreclosure plan called the Homeowner Affordability and Refinance Plan (HARP). Most homeowners want to know what it means for them, if they are likely to qualify, and what they need to do to obtain relief. The Plan's executive summary clearly states the problems that the Obama administration foreclosure plan is designed to address:

  • Due to falling property values, many homeowners cannot refinance into mortgages with lower interest rates.
  • Nearly six million homeowners are facing foreclosure, primarily due to the current recession.
  • The foreclosure epidemic is further depressing property values, with each foreclosure reducing nearby property values.

HARP was designed to help nearly 9 million households restructure or refinance their mortgages to avoid foreclosure. The plan has three key components:

  • Provide access to low-cost refinancing options for responsible homeowners suffering from falling home prices.
  • A $75 Billion Homeowner Stability Initiative for at-risk homeowners.
  • Supporting low mortgage rates by strengthening confidence in Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac.

Low-Cost Refinancing

The HARP program recognizes that many homeowners cannot take advantage of historically low interest rates, because their loan-to-value (LTV) ratios are too high for them to qualify for a refinance loan. Most lenders want to see an LTV of 80 percent or lower before they will consider approving a refinance loan; that is, homeowners must owe no more than 80 percent of the current value of their property (for example $80,000 or less on a $100,000 home).  Given the fact that property values have dropped as much as 25 percent or more in some areas of the U.S., many homeowners have seen their LTV's rise above the 80 percent cut off. In past years, refinances over the 80 percent mark would require the additional monthly cost of mortgage insurance.  Obama's foreclosure plan is designed to “help as many as 5 million responsible homeowners who took out conforming loans, previously had 20 percent or more equity and are guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.”  This new home mortgage would be completed without the addition of mortgage insurance regardless of the current loan to value.By refinancing into a loan with a lower interest rate, homeowners can save hundreds of dollars per month and thousands per year – perhaps enough to protect their homes from foreclosure. On a $200,000.00 mortgage, a 2% decrease in the interest rate drops the monthly payment $268.43 – an annual savings of $3,221.16.
$75 Billion Homeowner Stability Initiative

The $75 billion homeowner stability initiative targets at-risk homeowners, many of whom are stuck in adjustable-rate mortgages (ARMs) and have seen their house payments rise to 40 or even 50 percent of their monthly income. The program offers cash incentives to lenders and borrowers for working out loan modification agreements that result in reasonable, affordable monthly mortgage payments and enable the homeowners to keep their homes. Following are some key points about this component of the plan:

  • The primary goal of the initiative is to reduce homeowners' monthly payments to sustainable, affordable levels.
  • Real estate investors need not apply. This initiative is available exclusively to help homeowners retain possession of their primary residence.
  • The plan covers households “at risk of imminent default despite being current on their mortgage payments.” In other words, you can qualify even if you haven't yet missed a house payment.
  • Under the initiative, the lender is responsible to lower the interest rate so that the homeowners' monthly mortgage payment is no higher than 38 percent of their monthly gross income. If the payment is still not affordable at that level, the initiative matches “further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent.” Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.
  • The lower interest rate must remain in place for five years, at which time it can gradually be stepped up to the conforming loan rate in place at the time of the loan modification.
  • Servicers receive an up-front incentive of $1,000 for “each eligible modification meeting guidelines established under this initiative” plus a monthly incentive up to $1,000 per year for three years as long as the borrower remains current on the loan.
  • Borrowers receive an incentive of up to $1,000 per year for five years, as long as they stay current on their loan. The money is applied to pay down the balance on their loan; it is not given directly to the homeowners to spend as they wish.
  • Servicers receive a $500 incentive, and mortgage holders receive a $1,500 incentive for modifying at-risk loans before the borrowers fall behind. This is intended to provide early assistance to borrowers – before they default on their loans.
  • Mortgage holders receive an additional insurance payment, linked to declines in the home price index, on each modified loan. This is designed to discourage mortgage holders from foreclosing now out of fear that property values will fall even further if they wait to foreclose.
  • As part of the plan, the Treasury will develop uniform guidelines for loan modifications across the mortgage industry. All financial institutions that receive Financial Stability Plan financial assistance will be required to adhere to the guidelines.
  • Strong government oversight will be in place to monitor performance and ensure compliance with the plan's guidelines.
  • The plan allocates $1.5 Billion in relocation and other forms of assistance to renters displaced by foreclosure and $2 billion in neighborhood stabilization funds.

Low Mortgage Rates

The third major component of the Homeowner Affordability and Stability Plan is to “support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.” To accomplish this goal, the plan calls for the following:

  • Increasing the Treasury Department's funding commitment to Fannie Mae and Freddie Mac to ensure security of the mortgage market. Treasury is increasing its Preferred Stock Purchase Agreements to $200 billion each from their original level of $100 billion each.
  • To promote stability and liquidity, the Treasury Department will continue to purchase Fannie Mae and Freddie Mac mortgage-backed securities.
  • Treasury will increase the size of the GSEs' (Government Sponsored Enterprises') retained mortgage portfolios by $50 billion to $900 billion along with corresponding increases in allowable debt, so Fannie Mae and Freddie Mac can facilitate financing for the mortgage industry.
  • The administration will work with Fannie Mae and Freddie Mac to support the efforts of state housing finance agencies in serving homeowners.

For additional details, check out the links below…



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