The Home Affordable Refinance Program (HARP), the federal government's effort to help underwater homeowners refinance to low mortgage rates, has largely failed. A languid economic recovery, the presence of second mortgages, the added complication mortgage insurance brings to the table, and a flat-out unwillingness of some lenders to refinance older loans have all combined to stifle the refinance program which was introduced with such high expectations.
The program debuted in March 2009 as part of the administration's widespread effort to shore up the housing market. According to a report from the Federal Housing Finance Agency (FHFA), by February 2011, a total of 709,900 refinances were completed under HARP, a mere drop in the national bucket, especially when Washington predicted that their effort could help millions of homeowners.
With nearly 25 percent of the U.S. housing market underwater, it is evident that HARP is failing to reach even a fraction of the potential audience. (It is important to note that not all underwater homeowners would actually qualify for HARP.)
HARP is helping the wrong people
The same FHFA report showed only 40,906--less than 6 percent--of the HARP refinances completed from the program's inception through February 2011 went to homeowners who owed between 105 percent and 125 percent of their homes' value.
Only a small fraction of HARP refinances helped homeowners who had been the most underwater though still eligible for the program. The vast majority of HARP refinances have gone to those who are the least underwater.
Four reasons HARP has failed
There are several reasons why HARP has been unable to help millions of homeowners refinance into new home loans with lower payments and/or more stable loan terms.
1. Continued economic fallout. Derek Chen, an analyst at Barclays Capital, estimated that approximately one-third of homeowners who took out a mortgage in 2006 and 2007 are not eligible for HARP because their income has fallen since they took out their loan, their income wasn't fully documented, or they recently missed a mortgage payment.
If you want to refinance through HARP, you have to qualify for a new loan given your current income and credit history. If your current financial situation is in dire straits, so are your chances for a HARP refinance.
2. Second mortgage holders are balking. Another roadblock for many would-be refinancers is their second mortgage holder. If you have a second mortgage (for example, a home equity loan) when you decide to refinance your first mortgage, the new first mortgage is automatically plopped into the second position (because it is taken out after the second mortgage) unless the second mortgage lender agrees to subordinate its lien, putting it once again behind the first mortgage. Many second mortgage lenders have refused to do this for a HARP refinance, making it impossible to refinance the first mortgage.
3. Mortgage insurance problems. Plenty of borrowers with mortgage insurance on their existing home loans have found that refinancing through HARP requires a complicated insurance transfer process that few lenders were willing to undertake. With the majority of lenders reluctant to refinance a loan with more than 105 percent loan-to-value (even though borrowers can technically qualify with up to 125 percent LTV), many homeowners with mortgage insurance are simply out of luck when it comes to a HARP refinance.
4. Mortgage servicers drag their feet. Busy mortgage lenders, faced with the often complicated and time-consuming process of closing HARP refinances, keep pushing underwater borrowers to the backburner in favor of "regular" refinances that yield more profit and less hassle. Some see little reason to move borrowers who are paying higher-than-market interest rates into mortgages with lower interest rates.
Still, despite the poor showing of HARP so far, the FHFA announced earlier this year that it was extending the deadline of the program to June 30, 2012. Whether mortgage lenders will pick up the pace on HARP refis and whether interest rates will remain favorable enough to keep homeowners' interest before then--so to truly make a dent with underwater borrowers--remains to be seen. That said, it is hard to think that any of the barriers keeping borrowers from the program will be lifted anytime soon.
