Monday, May 21, 2018
Millions of homeowners found themselves in a difficult predicament after the U.S. housing bubble burst in 2006. As inventories soared nationwide, home prices plummeted. Many new homeowners saw the value of their homes drop below the balance of their mortgages, or nearly so. Later, these same homeowners were prevented from taking advantage of lower interest rates through refinancing, since banks traditionally require a loan-to-value ratio (LTV) of 80% or less to qualify for refinancing without private mortgage insurance(PMI).Take for example a house that was purchased for $160,000 but is now worth $100,000 due to the market decline. Further, assume the homeowner owes $120,000 on the mortgage. In this scenario, the loan-to-value ratio would be 120%, and if the homeowner chose to refinance, he would also have to pay for private mortgage insurance. If the homeowner was not already paying for PMI, the added cost could nullify much of the benefit of refinancing, so the homeowner could be effectively prohibited from refinancing.
The Home Affordable Refinance Program (HARP) was created by the Federal Housing Finance Agency in March 2009 to allow those with a loan-to-value ratio exceeding 80% to refinance without also paying for mortgage insurance. Originally, only those with an LTV of 105% could qualify. Later that same year, the program was expanded to include those with an LTV up to 125%. This meant that if someone owed $125,000 on a property that is currently worth $100,000, he would still be able to refinance and lock in a lower interest rate.
HARP 2.0 and PMI Having Private Mortgage Insurance (PMI) can be a problem for borrowers interested in the new 2012 Making Home Affordable Refinance Program. Homeowners who purchased their home by putting down less than 20% of the purchase price typically have PMI (typically with Freddie Mac or Fannie Mae). PMI would have been required by the original lender due to the high loan-to-value ratio and correlation to foreclosure. Having PMI attached to a loan made that loan easier to sell on the Wall Street secondary market as a "whole loan". PMI hedged this risk by offering insurance against forclosure for whomever owned the "whole loan". If your current loan has PMI it is likely your lender will not approve you. There are only a handful of lenders who will. Why? The main reason is most lenders will not accept the new PMI. Most of the major PMI companies have signed on to support HARP, however most lenders have not. Also, depending on the type of PMI and who the PMI company is may also be a roadblock. The good news is you don't need to go to your current lender if they don't accept your PMI, you can apply for the new HARP 2.0 loan with any lender.