More help is on the way for homeowners with underwater mortgages after the Federal Housing Finance Agency announced Thursday it would extend a popular federal refinancing initiative for another two years.
The Home Affordable Refinance Program, or HARP, was set to expire at the end of the year, but will now be available to homeowners with Fannie Mae- and Freddie Mac-backed mortgages through the end of 2015. The program allows borrowers with negative equity to reduce their monthly housing payments by refinancing at record low interest rates.
Since launching in April 2009, more than 2 million homeowners have refinanced their loans through HARP, a number the FHFA hopes to increase by extending the life of the program.
"We are extending the program so more underwater borrowers can benefit from lower interest rates," FHFA Acting Director Edward DeMarco, said in a statement.
Eligibility requirements for the program will remain the same. Loans refinanced through HARP must be guaranteed by Fannie Mae or Freddie Mac and must have a loan-to-value ratio greater than 80 percent. Borrowers must also be current on their mortgage payments with no missed payments in the past six months and no more than one late payment during the past year. Due to variables including the path of interest rates, borrower willingness to go through refinancing, and the number of lenders and servicers who choose to offer HARP refinances, it's difficult to nail down how many borrowers could potentially benefit from the HARP program.
While more than 2 million borrowers have already benefited from HARP, almost 14 million homeowners still owe more on their mortgages than what their homes are worth, according to the latest negative equity report from Zillow, an online real estate information source. That means there's much more work to be done when it comes to getting homeowners out of the red on their mortgages.
"Given the far-from-normal housing environment we're in, any option aimed at helping underwater borrowers is important, especially with interest rates at historic lows," Stan Humphries, Zillow's chief economist, wrote in an email.
It's especially important to jump on low interest rates now because of the likelihood rates will be rising in the next few years. After hovering at historic lows for several years now, "there's no doubt" rates will begin to creep up, Humphries says, dulling housing demand.
"The success of HARP depends on low interest rates," Humphries said. "[Rising interest rates] will have an undeniable effect on demand for housing, as homebuyers will have to spend more of their incomes to buy a home."
But while HARP might be extended, it isn't expanded. As housing prices rise, fewer borrowers will meet the 80 percent loan-to-value requirement, nudging more underwater homeowners away from eligibility, says Jed Kolko, chief economist at real estate information firm Trulia. In addition, neither the FHFA nor the GSEs have any legal authority to extend the HARP option to loans not owned or guaranteed by Fannie Mae or Freddie Mac, about 45 percent of the 52 million outstanding first mortgages according to data compiled by Freddie Mac.
The overall effect of HARP is transforming, too. When it was launched, it lowered monthly payments with the intent of preventing responsible borrowers from falling behind on their payments and risking losing their homes. Now, as prices continue to recovery, the impact is broader.
"Fewer people are falling behind on payments or risk losing their home, so the main effect of refinancing is economic stimulus," Kolko wrote in an email. "It lowers monthly payments, leaving people more money to spend on other things."
Wondering if you're eligible for the program? Find out if your loan is owned or guaranteed by Freddie Mac or Fannie Mae. Then contact your existing lender or a participating lender offering HARP refinances. For a HARP quote, check out Zillow's Mortgage Marketplace.