Harp Loan and Loan Modification

If you have any knowledge of this subject, and/or participated in or were a beneficiary of a HARP loan you’re likely thinking, these folks are late to the game, all this is over! Well, sort of. HARP, otherwise known as the Home Affordable Refinance Program, did end on December 31, 2018. The program was started post the 2008 financial crisis to help borrowers who were “underwater” to refinance their homes. The word underwater means what it sounds like – the borrower owed more than the home was worth - they were sunk. Housing prices plummeted during the crisis and many homeowners found themselves in this precarious position. To qualify for the HARP program, a homeowner needed to fulfill the following:

• Freddie Mac or Fannie Mae had to have owned the mortgage.

• The loan had to have originated prior to June 1, 2009.

• The loan-to-value ratio needed to be higher than 80%.

• The borrower needed to be current with his/her payments with no more than one late payment over the previous 12 months.

HARP was popular to say the least. The 2008 crisis (as most crises do) hit the American public like a ton of bricks. Yes, people took out loans that in theory they could not afford, but the backstops were there (in theory) so the risk was mitigated, at least in the short-term. But what happens when the entire market comes crashing down on the weight of so many underwater loans? Well, as we saw, financial institutions collapsed and the federal government had a critical decision on their hands. HARP was one of many responses to bail folks out.

Now that we no longer count on HARP as an option, let’s talk loan modification in general. Nearly the same as HARP, loan modification seeks to provide temporary or permanent relief to the borrower. There are different ways however to go about this. One is changing the borrower’s interest rate so that it is as close to the market rate as possible. Another is extending the loan term as well as re-amortizing payments over a longer period that means it will take longer to pay back the loan, but the monthly payments will be cheaper.

Finally, another option out there is the lender agreeing to set aside some of the excess principal and not charge any interest on it. This keeps payments cheaper, like the above mentioned alternatives, and the lender gets his or her money back eventually and does not risk the borrower completing defaulting which would be disastrous to both parties.

Loan modifications are tricky, but quite common, believe it or not. The best first step if you find yourself in this position is get your financial paperwork in order and ask for an appointment with your lender as soon as possible. A lender is much more amenable to these types of agreements when the borrower is up-front and transparent about the issues they’re going through. The worst-case scenario would be to wait until you can’t meet a payment and have that “deer in the headlights” look back at your lender. Banking professionals hate deer, and can’t stand when they look into headlights. Take note!