Two new programs for refinancing underwater and low-equity mortgages are due to launch Oct. 1. That means homeowners who owe more on their mortgage than the property is worth should have an easier time getting their mortgage refinanced into a better home loan.
The new programs, one each from Fannie Mae and Freddie Mac, will eventually replace HARP, the Home Affordable Refinance Program. Established in 2009, HARP is currently the only option for refinancing an underwater or low-equity conventional mortgage. Until recently, HARP was set to expire on Oct. 1 but has been extended to December 2018.
The new programs, the Freddie Mac Enhanced Relief Refinance and the Fannie Mae High Loan-to Value Refinance Option, have many advantages over HARP that should help more homeowners refinance into better loans. They also aren't scheduled to expire, as HARP is.
What makes a home underwater?
People with little or no equity in their homes can have difficulty qualifying for a refinanced loan at a better interest rate. Twenty percent equity or more is usually required. Fifteen percent of mortgage borrowers have less than 20 percent home equity, according to CoreLogic.
The thinking is that borrowers with little home equity are only a job loss, illness or other unpredictable financial disaster away from not making a house payment and will abandon their home to foreclosure if they owe more than the home is worth. As housing prices drop, so can equity in a home.
The housing crisis in late 2007 led to millions of homes losing value and borrowers losing equity and having their home underwater. HARP was started by the federal government in 2009 to help struggling homeowners stay in their homes. The program has worked well.
“HARP was meant for people who bought at the height of the market and didn’t have the ability to refinance,” says Jeremy David Schachter, a mortgage advisor and branch manager at Pinnacle Capital Mortgage in Phoenix.
Home values have gone up since the housing crash and “many people aren’t upside down anymore” on their mortgages, Schachter says.
Buoyed by an improving economy and housing market, the number of underwater homes dropped 24 percent from 4.1 million in the first quarter of 2016 to 3.1 million in the first quarter of 2017, according to an equity report by CoreLogic. Those 3.1 million homes represent 6.1 percent of all residential properties with a mortgage. During that same time, negative equity value decreased 7.1 percent to $283 billion.
HARP and other government-backed programs helped homeowners refinance low- to no-equity loans as housing values dropped.
How new streamline refi programs work
The new streamline refinance programs will replace HARP when it expires at the end of 2018. They’re run by Freddie Mac and Fannie Mae, two government programs that guarantee most home loans in the United States.
The new programs will run concurrently with HARP until HARP expires.
The Federal Housing Finance Agency says that more than 3.4 million homeowners have refinanced with HARP since it was introduced, and another 300,000 are eligible for HARP now.
One of the main advantages of the new streamline refinance programs is that they can be used for home loans originated at any time, says Patrick Morgan, a real estate broker and owner of Greenside Properties in Roseville, Calif. HARP was only for loans originated before June 1, 2009, Morgan says.
“Another issue is that once a borrower has HARP’d they can’t HARP again, but they can streamline,” he says. “A streamline borrower can streamline again and again.”
To qualify for HARP or the new programs, borrowers must benefit from the refinance in one of the following ways, says Richard Pisnoy of Silver Fin Capital Group:
- Lower loan payments.
- Lower interest rate.
- Go from an adjustable to a fixed rate loan.
- Shorten term of their loan.
The new programs require borrowers not to miss any mortgage payments in the past six months and not more than once in the past 12 months.
They require a loan-to-value minimum of 95.01 percent, meaning they can’t have more than 5 percent equity.
They don’t have minimum credit score requirements, a maximum debt-to-income ratio or a maximum loan-to-value, and don’t require an appraisal.
Another benefit is that unlike HARP, which focused on the past, the two new streamline refinance programs focus on the future. Since they don’t expire and can be used multiple times by borrowers, they can help homeowners in markets that may have problems in the future.
“These are ways to assist people who are underwater on their homes or have almost no equity lower their payments or change their mortgage product when they didn’t have the options to do so before,” Pisnoy says.
For someone with little or no equity in their house, it could be enough help to get their head above water and keep their home.