HARP's Upside Down Legacy

Where HARP is Leading

Will the Home Affordable Refinance Program (HARP) sentence millions of homeowners to negative, or very little equity, for the next five years or longer?  More importantly, how will homeowners, who have refinanced using HARP react, once they lose faith in the solution they were sold?

A report issued recently by Zillow indicates a national negative equity rate of nearly 25%.  However, and more ominously, when homeowners that have equity between 100 and less than 80 percent, the number zooms up to nearly 44% or a total of about 22 million homeowners.

Let’s not forget that home values are recovering right now.  The data could be worse!  What will happen if this trend reverses or slows as many predict as more homes on the market, but fewer buyers to purchase them?

Many homeowners have already cried uncle and turned in the keys.  Enter the president’s HARP initiative that was designed to let underwater homeowners, current on their mortgages, take advantage of historically low-interest rates.  A second reason was to induce homeowners to stay in their homes.  The program has been revised several times and virtually all restrictions on loan to value have been eliminated.

As negative equity homeowners wake up from their low-interest rate haze and figure out the mathematical trap they have entered, things could get real dicey.  Let me spell it out for you.  Suppose a family whose loan is 25% greater than the value of their home (125% loan to value) refinanced right now into a new 30 year mortgage at 3.5%.  With a loan balance of $175,000, it will take until mid-2017, to repay ten percent ($17,500) of the loan’s principal.  If housing values remain flat where they live, this family’s mortgage will still exceed the value of their home by about 15% after nearly four and a half years of payments.  Even with modest yearly appreciation of two percent on average, they will still be upside down.  That hardly seems fair doesn’t it?

It is my prediction that once the legion of homeowners realize they have been sold a phony bill of HARP goods, for a second or third time no less, their keys will literally fly out of their pockets.  And frankly, I do not blame them for thinking and feeling the deck is stacked against them because it is.

The administration’s HARP program helped out banks more than homeowners.  A refinance program was created to keep the loan pipelines full.  Does anyone else have a sense that HARP rewards the wrong group just like the TARP bailout of banks?

A solution that would really help homeowners and prevent a massive wave of new strategic defaults is a modest principal reduction to 100% loan to value coupled with a loan modification.  The loan modification, unlike a refinance, should include three features: a low market-based interest rate, a payment schedule that begins exactly where the old loan left off, and a loan based on simple, rather than amortized interest so that the balance can be paid back quicker.

HARP has been extended through 2015.  The program should be revised immediately by Congress with the goal of truly helping homeowners and reducing risks to banks, investors, and Fannie Mae and Freddie Mac.

Now that would be a worthy legacy for the program.

Author: Robert Katula

What say you, the people?