HARP, HAMP and the Good, Bad and Ugly Initiatives of the Obama Administration

As nearly 3 million Americans face foreclosure or underwater homes, the Obama administration is initiating programs such as HARP and HAMP and people question how many are really getting help.

Initially, the Obama administration introduced the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP) to help homeowners facing foreclosure. Now the HARP program has been revamped to help homeowners with no equity to refinance. People are questioning the guidelines and who is really getting help from these programs.

What is HARP?

HARP started in 2009 to help borrowers with loans backed by Freddie Mac and Fannie May who were current on payments. The original program was limited to borrowers owing 80 percent to 106 percent of the value of their homes. Owing more than the house is worth is referred to as being “underwater.”

By the middle of 2009, the program opened to borrowers owing up to 125 percent of the value of their homes. The reports less than 900,000 homeowners refinanced under HARP. Only 72,000 of them are underwater. HARP was recently changed to include borrowers no matter how far underwater they might be. However, those who have already refinanced under HARP can't do it again.

HARP Changes

Besides allowed all underwater homeowners to refinance, the risk of banks being forced to “buy back” defaulted mortgages was minimizes. Due to extensive documentation requirement, some borrowers were locked into going to their current lender to qualify for HARP.

The new changes largely shield banks from the risk of “buy back” on HARP mortgages. Now borrowers just need to show they are employed or receive regular income. They cannot miss more than one payment in the past year and need to have made their last six payments to qualify. This streamlines the borrowing process so homeowners don't need to get appraisals or submit voluminous documentation.

What About Freddie and Fannie?

Risky borrowers face lower fees from Freddie and Fannie. Their regulator, the Federal Housing Finance Agency, will waive fees for borrowers refinancing with a shorter term mortgage loan, such as 15 years. Fees are reduced for everyone else. More details will be issued by Freddie and Fannie on November 15 with applications being taken as soon as December 1. HARP will be extended through 2013, beyond the original expiration date of June, 2012.

The downside for borrowers who do not have a loan owned by Freddie and Fanni will not be able to refinance through the HARP program. Included are underwater subprime mortgages held by privately held mortgage securities and “jumbo” mortgages. Despite these exclusions, the programs hopes to help an additional 800,000 to 1 million borrowers through HARP.

What is HAMP?

Many homeowners are underwater and have already missed multiple mortgage payments. Home Affordable Modification Program (HAMP) helps homeowners avoid foreclosure by modifying loans to an affordable level. The Making Home Affordable website states the criteria that must be met. Unlike HARP, the borrower must be delinquent on their mortgage or face immediate risk of default. The property in question must be the borrower's primary residence. The mortgage loan has to be originated on or prior to January 1, 2009. The unpaid principal balance must not exceed $729,750 for one-unit properties.

The goal is to adjust the monthly mortgage payment to 31 percent of the borrower's total pretax monthly income. Ways to achieve this under HAMP include reducing the interest rate to as low as 2 percent, extending the loan to 40 years or deferring (forbear) a portion of the principal until the loan is paid off. Interest is waived on the deferred amount.

The total number of mortgage eligible for HAMP as of July 31, 2011 was 2,564,766. The total number of permanent modifications started was only 816,833.

While HARP and HAMP attempt to address the problem, clearly there are still many homeowners falling through the cracks. Meanwhile, mortgage lenders such as Bank of America are showing major profits and letting go of more employees. It seems foreclosure and unemployment will continue to plague a large number of people despite these initiatives from the Obama administration.

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