|Picture Courtesy of the Associated Press|
In 2009, Obama released the original economic stimulus plan, Home Affordable Refinance Program (HARP), which was designed to stabilize communities hit by foreclosures or abandonment. At the end of October, Obama pitched his latest proposal to attempt to relieve the economic and political fallout of a housing crisis that has hindered him as he seeks a second term in office. He has decided that it is not worth waiting for a dysfunctional Congress to take the first steps.
The Federal Housing Agency has estimated that this revamped refinancing program will benefit an additional one million homeowners. Moody's Analytics say the figure could even be as high as 1.6 million.
What is Harp?
HARP attempted to help borrowers pay off existing loans that were backed by Fannie Mae and Freddie Mac and who were current on their payments. Basically, if you were making your payments on time but didn’t have enough equity to refinance, you would be able to lower your rate without having to pay down your mortgage balance or take out mortgage insurance.
Just to clarify, equity is the difference between the market value of your property (how much you could currently sell it for) and how much you owe on your mortgage. For example, if your home is worth $250,000 and your mortgage balance is $150,000, you have $100,000 in equity, or 40 percent of the property’s value ($100,000 divided by $250,000).
At first, the program was restricted to borrowers who owed between 80% and 105% the value of their homes. The program was eventually opened up to borrowers who owed up to 125% the value of their homes. However, fewer than 900,000 homeowners have refinanced under HARP over the past two years, and just 72,000 of those borrowers have loan-to-value ratios between 105% and 125%.
With Obama’s new mortgage relief plan, borrowers will be able to refinance regardless of how far their homes have fallen in value, eliminating previous limits. Millions of Americans with homes have witnessed a significant drop in the value of their homes in the past few years. This plan will hopefully help deal with one of the most critical hurdles in the current economic recession—a slow housing market caused in part by an excess of homeowners who are unable to refinance. This should specifically have a large impact in certain parts of Nevada, Arizona, and Florida where many borrowers owe more than 125% of the value of their homes.
Furthermore, banks will only have to verify that borrowers meet a certain set of eligibility rules:
1. That they’ve made their last six mortgage payments.
2. That they have no more than one missed payment in the last year.
3. That they have a job or another source of regular income.
This will make the refinance process a lot more efficient by mostly eliminating the need for borrowers to obtain estimates of the value of their homes or to provide extensive income documentation. Instead, borrowers will only have to show that they’re current on their mortgage and have a job or another source of regular income.
Read more about Obama’s new mortgage relief plan in the Wall Street Journal: http://blogs.wsj.com/developments/2011/10/23/twelve-questions-on-obamas-refi-plan/
Written by Michelle Stricklin, National Association of Consumer Advocates