De-mystifying The Home Affordable Refinancing Program (HARP)
In 2008 the U.S. housing bubble finally burst. This catastrophic occurrence rippled through the world economy, leaving financial ruins in its wake.
Few sectors in the United States were harder hit than the housing market. Homeowners watched helplessly as the value of their homes dropped far beneath what they owed on the mortgage.
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As a result, the number of foreclosures soared like never before. This in turn caused a flood of vacant properties on the housing market, and this supply glut lowered home prices even further.
If this vicious cycle had been allowed to continue, it could have undermined the entire national economy. Clearly something had to be done, and the Federal Housing Finance Agency stepped into the picture.
The FHA created the HARP program in order to give the multitude of distressed homeowners
a chance to refinance their unsustainable mortgages.
Many of these homeowners had problematic loan to value (LTV) ratios on their mortgages. As an illustration, a hypothetical homeowner lives in a house that was bought for $160,000. Due to the plunging market, the home is now valued at only $100,000. At the same time, they still owe $120,000 on the house. This means that their LTV would be 120% because they owe 120% of what the house is valued at.
In the past, banks would not allow people with an LTV of over 80% to refinance their homes without purchasing private mortgage insurance. The HARP program changed this situation.
Initially, borrowers with an LTV of 105% were allowed to refinance, and then this number was changed to allow anyone to refinance their home, regardless of how high their LTV is.
This program helps distressed homeowners in many important ways. For one thing, it has helped to prevent a large number of foreclosures. It does this by allowing owners to negotiate a monthly payment that is within their financial reach.
Another important aspect is the way it protects borrowers’ bottom line. By restructuring the mortgage, the homeowners end up only paying what the home is actually worth, not the inflated bubble price.
The program has also helped the economy as a whole. By making sure that borrowers stay in their homes and make payments that are realistic, HARP helps to stabilize many individuals and families. These people are them able to participate in the economy to a larger extent than they otherwise could. This strengthens the economy and gives everyone a bigger slice of the pie.