Is the Home Affordable Refinance Program for you?
A few years ago, the Home Affordable Refinance Program (HARP) was started with the purpose of providing relief to homeowners who had a home equity lower than 20% and allow them to refinance with less expensive loan options.
Lenders were not too happy with the program because the government was now financing the less-expensive loans, and would also be looking into the underwriting of the mortgages. The lenders were afraid that the government would force them to buy back mortgages that did not meet the underwriting standards.
HARP was later modified to include borrowers with mortgages that were greater than the value of their homes. Those who had paid their last six consecutive mortgage payments and have a source of income were qualified to refinance under program HARP. Further enticement was provided by reducing or eliminating loan fees for those borrowers who refinanced into mortgages with shorter terms.
The HARP modified program is expected to start a spurt of refinancing. The average rate for a 30-year fixed loan is 4.11%, whereas for a 15-year mortgage, this is nearer 3.5%. Homeowners who—until now— were unable to refinance to lower priced home loans due to the prevailing restrictive lending standards, will now be able to do so.
As per the estimates of the Federal Housing Finance Agency; more than one million borrowers should now be able to refinance with the updated guidelines. However, homeowner loans that are greater than 125% of the borrowing limits of their property value, can participate in HARP early next year. Although HARP was initially formulated to terminate in June 2012, it has now been extended to include 2013 as well.
There are still many hurdles to be overcome before there is real growth in refinancing in the beleaguered housing market. Since the entire mortgage market in the US is controlled by only four banks, there is not much competition to be expected.
Stocks performance tied to the housing market have also not shown anything spectacular in 2011. Rather, they have declined by 6.5%. In contrast, the Residential shares of the FTSE NAREIT (also known as the iShares ETF and focuses on apartment building owners) has gone up to 8.21%.
In addition, investors who hold mortgage-backed securities could be set to lose billions of dollars, since mortgages may be paid off sooner now. Investors are still not clear how they should invest in the current interest rate and credit scenario.
Overall, HARP can be seen as a start for helping the qualified borrowers in reducing the cost of their mortgages.
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