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Millions of homeowners found themselves in a difficult predicament after the U.S. housing
bubble burst in 2006. As inventories soared nationwide, home prices plummeted. Many new
homeowners saw the value of their homes drop below the balance of their mortgages, or nearly
so. Later, these same homeowners were prevented from taking advantage of lower interest
rates through refinancing, since banks traditionally require a loan-to-value ratio (LTV) of
80% or less to qualify for refinancing without private mortgage insurance(PMI).Take for
example a house that was purchased for $160,000 but is now worth $100,000 due to the market
Further, assume the homeowner owes $120,000 on the mortgage. In this scenario, the
loan-to-value ratio would be 120%, and if the homeowner chose to refinance, he would also
have to pay for private mortgage insurance. If the homeowner was not already paying for PMI,
the added cost could nullify much of the benefit of refinancing, so the homeowner could be
effectively prohibited from refinancing.
The Home Affordable Refinance Program (HARP) was created by the Federal Housing Finance
Agency in March 2009 to allow those with a loan-to-value ratio exceeding 80% to refinance
without also paying for mortgage insurance. Originally, only those with an LTV of 105% could
qualify. Later that same year, the program was expanded to include those with an LTV up to
125%. This meant that if someone owed $125,000 on a property that is currently worth
$100,000, he would still be able to refinance and lock in a lower interest rate.
In December 2011, the rule was changed yet again; there would no longer be any limit on
negative equity for mortgages up to 30 years – so even those owing more than 125% of their
home value could refinance without PMI.
Having Private Mortgage Insurance (PMI) can be a problem for borrowers interested in the new
2012 Making Home Affordable Refinance Program. Homeowners who purchased their home by
putting down less than 20% of the purchase price typically have PMI (typically with Freddie
Mac or Fannie Mae).
PMI would have been required by the original lender due to the high loan-to-value ratio and
correlation to foreclosure. Having PMI attached to a loan made that loan easier to sell on
the Wall Street secondary market as a "whole loan". PMI hedged this risk by
offering insurance against foreclosure for whomever owned the "whole loan". If
your current loan has PMI it is likely your lender will not approve you. There are only a
handful of lenders who will. Why? The main reason is most lenders will not accept the new
Most of the major PMI companies have signed on to support HARP, however most lenders have
not. Also, depending on the type of PMI and who the PMI company is may also be a roadblock.
The good news is you don't need to go to your current lender if they don't accept your PMI,
you can apply for the new HARP 2.0 loan with any lender.
Another feature of HARP is that applicants can forgo a home appraisal if a reliable automated
valuation model is available in the area. This can save the borrower time and money, but is
subject to the discretion of the mortgage servicer.
As part of the 2012 State of the Union Address, President Barack Obama referenced a plan to
give "every responsible homeowner the chance to save about $3,000 a year on their
mortgage". Within the mortgage industry, this plan is being referred to as HARP 3.0.
The plan has not passed. HARP 3.0 is expected to expand HARP's eligibility requirements to
homeowners with non-Fannie Mae and non-Freddie Mac mortgages, including homeowners with
jumbo mortgages and Alt-A mortgages, those whose original mortgages were stated income,
stated asset, or both.
HARP is scheduled to end on December 31, 2013.