When interest rates fall, many homeowners will refinance their mortgage to lock in a lower interest rate, which can reduce a borrower's monthly payment or allow a homeowner to build equity more quickly. However, one group of homeowners who typically have trouble refinancing are those in negative equity. This means they owe more on their mortgage than what their home is presently worth. In the first quarter of 2020, about 1.8 million homes were in negative equity, representing 3.4% of all mortgaged properties.

In the past, borrowers with underwater mortgages could take advantage of lower interest rates by refinancing through the Home Affordable Refinance Program (HARP). However, this program expired at the end 2018.

In this article, we will discuss the benefits that HARP provided to homeowners, in addition to available existing options for homeowners looking to refinance their mortgages.

Key Takeaways

  • HARP was a government program designed to help underwater homeowners refinance mortgages at more attractive interest rates.
  • The program started on April 1, 2009 and ended on December 31, 2018.
  • Approximately 3.45 million borrowers took advantage of HARP.
  • Refinancing options for distressed homeowners today include programs from Fannie Mae and Freddie Mac.

What Was HARP?

HARP was a government program established in April 2009 under the Federal Housing Finance Agency (FHFA) in response to the 2007-08 financial crisis. The idea was to help homeowners refinance loans on properties that were worth less than their outstanding mortgage. Approximately 3.45 million borrowers took advantage of the program.

HARP was aimed at borrowers who had a loan-to-value ratio (LTV) of greater than 80%. Typically, these borrowers have trouble securing refinancing because of lack of equity in their homes, thus they cannot benefit from falling interest rates. Originally, borrowers were eligible for HARP assistance if their LTV ratio was no greater than 105%. This cap was raised to 125% in July 2009, then lifted entirely in October 2011.

Between the program's inception and February 2015, approximately 3.29 million mortgages were refinanced under HARP. Of these, 2.3 million had an LTV ratio of 80% to 105%. About 567,000 mortgages had an LTV of 105% to 125%, while 421,500 loans had ratios greater than 125%.

HARP was originally scheduled to expire at the end of 2016, but the government extended the program by two years. 

Qualifying

Homeowners were required to meet the following criteria to qualify for HARP:

  • A basic requirement was a mortgage owned or guaranteed by Freddie Mac or Fannie Mae, closed on or before May 31, 2009.
  • The original loan must have had an LTV ratio of at least 80%.
  • Crucially, the borrower could not be delinquent on their mortgage payments. They could have no late payments over the past six months, and no more than one 30-day late payment over the preceding 12 months.
  • There was no minimum credit score.

The program didn't actually lend money. Instead, HARP worked with lenders to offer refinancing. Homeowners could check with their current lender or access a HARP website to see if the lender participated in the program.

Life After HARP

Although HARP has ended, Fannie Mae and Freddie Mac both have programs for distressed borrowers to refinance their homes.

Fannie Mae High LTV Refinance Option

This program is for borrowers who pay their existing Fannie Mae mortgages on time but have an LTV ratio that exceeds the maximum allowed for a standard limited cash-out refinance.

The refinance option must result in one of the following for the borrower:

  • A lower principal and interest payment
  • A lower interest rate
  • A shorter amortization term
  • A more stable mortgage product, such as moving from an adjustable to fixed-rate mortgage

Borrowers must be current with their payments with no 30-day delinquency in the most recent six months. In addition, they can have no more than one 30-day delinquency over the past year, and no delinquency greater than 30 days.

Freddie Mac Enhanced Relief Refinance Mortgage

This program is for Freddie Mac borrowers who are on time with their monthly payments but are disqualified from the standard "no cash-out" refinance option from Freddie Mac because the new mortgage would exceed maximum LTV limits. There is no maximum LTV ratio for fixed-rate mortgages, while adjustable-rate mortgages have a maximum LTV of 105%.

The Bottom Line

Before HARP expired, the program helped millions of homeowners to refinance underwater mortgages. While HARP didn't decrease the amount they owed, borrowers benefited from lower interest rates and monthly payments. Although the program no longer exists, Fannie Mae and Freddie Mac continue to offer refinancing options for borrowers.