Editor’s Note: The HARP program expired Dec. 31, 2018, but most homes have increased in value considerably since HARP rolled out. This means many homeowners may currently be eligible for a standard conventional refinance.
Four Big Ideas to Make HARP 3.0 a Reality
HARP 3.0 could turn out to be the most helpful refinance program in history.
Now if it could only make its way through Congress.
This legislation, also known as S.249 or the Responsible Homeowner Refinancing Act of 2013, is still in committee after trying to make its way through Congress since early 2013.
Current HARP 3.0 Bill Missing Key Element
Even if this bill were signed into law, it would be missing a vital aspect that would keep millions from participating in HARP: it would not allow non-Fannie Mae and non-Freddie Mac loans to participate in the program.
So anyone with a jumbo loan, Alt-A, or Subprime, or any loan kept in a private banks’ portfolio, would still be locked out of refinancing.
Allowing these loans that are not owned by the government-sponsored enterprises, or GSEs, is essential to any successful HARP 3.0 program.
But Congress is not likely to pass such an allowance because of risk to the GSEs. Here are some ideas that would make sweeping HARP 3.0 legislation a real possibility.
Big Idea #1: Add a Funding Fee to HARP 3.0 Loans
It’s a major gamble for Fannie Mae and Freddie Mac to refinance loans they don’t already own. They’re already on the hook for loans they made in the past, but not for non-GSE loans.
That’s why a new HARP bill should allow non-GSE loans to participate, but require these loans to pay an upfront funding fee. This fee would pay for any increased loan defaults Fannie and Freddie would experience.
Government-backed loans already take this approach. Veteran’s Administration (VA) loans require a 2.15% upfront funding fee. Federal Housing Administration (FHA) loans require a 1.75% upfront fee.
If the same idea were implemented for non-GSE HARP loans, the fee could help fund an insurance pool that would pay for HARP 3.0 foreclosures. Mortgage insurance has been a proven method to offset risk for lenders for decades.
This fee could range anywhere from two to three percent of the loan amount and it could be rolled into the loan amount so it would not add to cash the borrower would need to bring to closing. If HARP 3.0 paid for itself, members of Congress could only look good by attaching their names to it.
Big Idea #2: HARP 3.0 Test Markets in 2014
What do corporations worldwide do when introducing a new product? They test it in certain markets.
If the product performs well in representative areas, it’s assumed it will work on a larger scale.
The same idea could be put into practice with HARP 3.0. The legislation could require tests in key areas, such as Phoenix, Arizona, Miami, Florida, and Los Angeles, California. The program would have to prove sustainable in these aspects:
- There are a manageable number of defaults
- The loan program breaks even or is profitable
- There is adequate participation
- Homeowners are successfully reducing their payments and getting into fixed-rate loans.
The idea of a test run has already been implemented in Oregon, with a program nicknamed the “Merkley Mortgage” after Senator Jeff Merkley (D-Ore.), who introduced the idea. This loan program offers a refinance to any homeowner, despite who owns their loan. It has already been expanded from just one county to three.
If Congress is willing, a HARP 3.0 test could follow the same pattern and could be rolled out nationwide, perhaps even in 2014.
Big Idea #3: Place Loan-to-value Limits on Non-GSE HARP 3.0 Loans
One way to limit risk of the new non-GSE loans added to Fannie and Freddie portfolios would be to set up loan-to-value limits.
For instance, if the loan-to-value limit were 150%, a homeowner who has a home worth $100,000 could refinance up to a $150,000 loan amount. But if the homeowner needed a $175,000 loan, they could not do the loan – yet.
Admittedly, this requirement would block the most severely underwater homeowners from participating. But the idea would be to remove the loan-to-value (LTV) limits after time. We saw this occur once already, when HARP 1.0 changed to HARP 2.0. The LTV limits were removed and many more homeowners became eligible.
And with property values increasing by double digits in many areas, LTV limits may not be as restrictive as they once were.
Big Idea #4: Set Up a Buyer Database to Quickly Sell HARP 3.0 Foreclosures
Inevitably, the HARP 3.0 program will produce extra foreclosures on the GSE’s books. But that shouldn’t deter Congress from offering the program. Fannie Mae already has a website dedicated to selling its foreclosed properties, called HomePath. Freddie Mac’s version is called HomeSteps.
Why not add a form to these websites where interested buyers could request updates as new properties become available? And, a marketing campaign could be launched to increase awareness of these discounted GSE properties.
The quicker the GSEs could get rid of foreclosed HARP 3.0 properties, the more attractive legislation might be to lawmakers.
Congress and Homeowners Would Benefit
It’s perfectly understandable that lawmakers are a bit anxious about HARP 3.0. After all, no one wants their name on a law that has the potential to cost taxpayers. Nor do we want a repeat of the recent housing crisis.
Yet HARP 3.0 could potentially help millions of homeowners get into fixed rate loans while lowering their payments. This would be a boon for the economy as billions of dollars would be redirected from mortgage payments to other spending and saving.
Tell your Representative
It’s fairly easy to write to your Representative and tell him or her your desire to see HARP 3.0 happen. Simply go to the House of Representatives website and enter your zip code. Then copy and paste the below message to the member of Congress who represents your area:
Four Big Ideas to Help a HARP 3.0 Law Pass in 2014
Dear Representative (Rep’s last name):
I’m concerned because many homeowners in my area still can’t refinance with HARP because their loans are not owned by Fannie Mae or Freddie Mac. Please consider sponsoring a bill that would allow the Home Affordable Refinance Program (HARP) to accept non-GSE loans. Here’s how we could make the program work:
1) Require a funding fee for non-GSE loans that would help pay for the program; 2) Roll out the new HARP rules in select markets until it proves to be a viable program; 3) Set temporary loan-to-value limits on non-GSE loans to limit risk; 4) Establish an awareness campaign and buyer database to quickly sell any additional foreclosures caused by the new HARP rules.
(Your name here)
HARP 3.0 Could Happen in 2014
With enough input from the public and some good practical ways to make it happen, members of Congress could pass a HARP 3.0 law. With the right legislation, HARP 3.0 could make Congress and homeowners very happy in 2014.