ARP: The Refinancing Program That Saved Millions of Homes in 2009

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The Great Recession caused millions of Americans to lose not only their jobs but also their homes. To prevent this, a government agency launched an alternative to the conventional refinancing plan called HARP. Learn more about it in this article.

Most home loans that start with fixed interest rates will have to shift to variable interest, which can be good or bad, depending on market conditions and the percentages.

If this interest rate goes up, mortgage repayments also increase. It could put a significant financial burden on the household. However, if it goes down, fees also decrease. This is why many homeowners quickly refinance to lock in the low interest rate.

The problem is, not everyone can do it—certainly not most of the homeowners during the Great Recession.

The Effect of Mortgage and Home Value of the Great Recession

Investopedia has one of the comprehensive look-backs on the events that led to one of the biggest financial disasters in history. The story began as early as the first years after the turn of the century when the Federal Reserve lowered the interest rate from a high 6.5 percent to a measly 1 percent by 2003 to stimulate the economy by attracting more individual and business borrowers.

This resulted in the mortgage boom when home prices soared because of high demand and low home loan rates. But that’s not all. Credit was also cheap, and lending rules were loose that even subprime borrowers or those with poor or no credit history could buy a house.

The lenders then sold these loans to Wall Street, which then packaged these debts into mortgage-backed securities, among others, for investors who want to earn some good money.

By 2004, though, interest rates began climbing that by 2007, the percentage was already 5.25 percent. Mortgage repayments became less affordable and, for subprime borrowers, impossible to pay. Worse, home prices also fell.

Not only were thousands of subprime homeowners defaulting, but even those who qualified for conventional loans struggled to pay off the mortgage or even sell the property. Most of all, they could not refinance since the value of their house was already significantly lower than their debt.

FHFA Came to the Rescue

By 2008, about 10 million Americans lost their homes. To prevent others from suffering the same fate, the following year, the Federal Housing Finance Agency (FHFA) introduced an alternative to conventional refinance called HARP (Home Affordable Refinance Program).

Under HARP, those who had a loan-to-value (LTV) ratio of over 80 could apply for refinancing while being backed by the FHFA. Moreover, they could apply even if the homeowner didn’t have a credit score, which meant subprime borrowers could participate.

These mortgages, though, should also be either guaranteed or owned by Freddie Mac or Fannie May on or before May 31, 2009. The homeowners should also didn’t have any default or delinquent payments for the last six months.

The program ran from 2009 to 2018 after it was granted an extension of two more years. In the end, it helped almost 3.5 million Americans.

What Happened after HARP?

The government saw that HARP was successful in helping hundreds of Americans avoid foreclosures and defaults by having more access to other types of refinancing. For this reason, both Freddie Mac and Fannie Mae introduced substitutes to HARP.

Not all lenders offer these alternatives, but usually, those who participated in HARP are likely to offer them now. For those living in Arizona, they can check out this mortgage company.

What can borrowers expect from these alternatives?

The Freddie Mac Enhanced Relief Refinance Progam is intended for Freddie Mac borrowers who make timely payments but cannot qualify for the no-cash-out refinancing since the LTV ratio will already exceed the standard limit because of the new mortgage.

Under this option, borrowers are no longer tied to any LTV ratio, which means those with underwater mortgages can already apply. Further, lenders are also more likely to consider the payment history and the present status of the mortgage than the income or even credit score of the applicant.

Meanwhile, the Fannie Mae High LTV Refinance Program works similarly to that of Freddie Mac, only that this is exclusive to Fannie Mae borrowers.

Under this, borrowers can move their mortgage insurance to their new loan, and applicants may need to submit fewer requirements or documents. Income, cash reserves at closing, and assets that may function as collateral don’t matter.

In exchange, the refinancing should result in a lower amortization and principal repayments, shorter loan term, and a shift from adjustable to a fixed-rate mortgage.

The mortgage conditions today are different from those in the early years of the 2000s. The lenders, the market, and the countries have learned.

Nevertheless, the threat of having negative equity on the property is still there. In fact, it’s still happening among hundreds of homeowners. Knowing that there are ways to get out of this financial mess should hopefully provide these borrowers with some peace of mind.