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Founder, CFP® Joel Ohman

UPDATED: Jun 5, 2013

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HARP 3.0, the proposed upgrade to HARP 2.0, has been pushed forward by Sen. Robert Menendez (D-N.J.) and Sen. Barbara Boxer (D-Calif.) as the Responsible Homeowner Refinancing Act of 2013. It currently sits before a committee, pending rejection or progression  to a Senate vote.

While many mortgage loan borrowers were overjoyed by HARP 2.0, which made it far easier for underwater homeowners to refinance their mortgage loans, even more have high hopes for its next version. However, HARP 3.0 is still in its embryonic stage.

This new version may very well end up coming to the Senate floor as a minimal change, but most are hoping that it develops into a massive benefit for mortgage loan borrowers across the country. The specific benefit they’re hoping for is the removal of HARP’s current requirement of only permitting mortgage loans that are guaranteed by Fannie Mae or Freddie Mac.

To learn more about HARP 3.0, spoke with two mortgage loan industry insiders.

Rick Sharga, Executive Vice President of Carrington Mortgage Holdings LLC, told that HARP 3.0 would extend the program to cover borrowers whose mortgage loans are not owned or insured by Fannie Mae and Freddie Mac.

“The [original] HARP program was established to allow borrowers with less than 20% equity in their homes to refinance their loans at the historically low interest rates available today,” said Sharga. “HARP was designed especially for borrowers with negative equity – people who owed more on their mortgage than their home was worth – but who were current on their payments.”

Sharga said that legislators believed that by creating a refinance program that helped underwater borrowers reduce their monthly payments, fewer borrowers would default. Not coincidentally, our lawmakers also hoped that with more disposable income every month, many of these borrowers would increase their overall spending and consequently help the struggling economy recover. 

Leslie Oliver, Senior Mortgage Banker at DLJ Financial, reminded that, for the moment, HARP 3.0 is little more than theory since it is still pending legislation. Despite being little more than a simple possibility right now, she did agree with Sharga that HARP 3.0 would aid homeowners whose mortgage loans were not backed by Fannie Mae or Freddie Mac.

At least, it would aid those homeowners who still meet the program’s other qualifications.

As per the information available now, borrowers will only qualify for HARP 3.0 if their mortgage loan:

  • Was owned or guaranteed by Fannie Mae or Freddie Mac on or before May 31, 2009.
  • Has not been previously refinanced via HARP’s prior iterations, with the exception of Fannie Mae loans refinanced under HARP between March and May of 2009
  • Has a loan-to-value ratio of 80 percent or more
  • Has been paid on time for the past 6 months.


A History of HARPs

HARP is a simple acronym for the government-sponsored Home Affordable Refinance Program. The proposal for HARP 3.0 was born out of the success of HARP and HARP 2.0. Sharga said that over 2 million mortgage loans were refinanced thanks to the program. However, some people were left “out in the rain” and not covered by the first and second HARP iterations.

“Many of the borrowers who are upside down on their loans do not have Fannie Mae or Freddie Mac loans, making them ineligible for the program,” said Sharga. “While the overwhelming majority (over 90%) of loans today are backed by a government entity, this wasn’t the case from 2003-2009 when many of the troubled loans were subprime, Alt-A or jumbo loans.”

In other words, those who financed the purchase of a property during the housing boom and collapse — arguably the audience who is in most need of help — have been unable to make use of either HARP or HARP 2.0. And unfortunately, according to Sharga, there aren’t any “alternative loan products available today to help those borrowers reduce the interest rates on their loans.”

Without that relief, Sharga said these borrowers were hit with a “double whammy” that resulted in them making payments on properties that were valued at less than their mortgages, while simultaneously making payments based upon interest rates that were several points above current and near-current market rates. By expanding HARP  to include these underwater mortgage loan borrowers (who do not have Fannie- or Freddie-backed loans), legislators intend to generate millions of refinanced mortgage loans and a stimulus of freed-up disposable income that can be dumped into the economy.

Oliver told us that HARP 3.0’s backers, Sen. Menendez and Sen. Boxer, believe that the program’s third iteration will provide much-needed relief for homeowners that are struggling with high interest rate mortgage loans. The two senators believe that the bill is a “triple win” in which “homeowners will have more money in their pockets, Fannie and Freddie will see fewer foreclosures, and the housing market, and economy will continue building momentum.”

While the most significant difference between HARP 2.0 and the proposed HARP 3.0 is that the program would become available to borrowers who do not have loans owned or insured by Fannie Mae or Freddie Mac, there are some other changes that borrowers are hoping to see.

“There has also been discussion about extending the date of eligible loans from June of 2009 to sometime in 2010 or even 2011,” Sharga told us. “Since the bill hasn’t even been submitted to committee yet, it’s hard to guess what other changes might be in store when – or if – HARP 3.0 happens.”

These potential differences aside, there are several pros and cons to HARP 3.0, at least in its current form.

Pros and Cons

According to the two experts, HARP 3.0’s pros would result in:

  • Reducing current borrowers’ mortgage loan interest rates by 0.5 to 3 percent
  • Borrowers rebuilding equity quicker since they will have new lower interest rates
  • Borrowers having more disposable income available each month, which they could use to pay down other debts or spend on other purchases, providing some economic stimulus
  • Streamlined refinancing for all Fannie and Freddie borrowers, regardless of whether they are underwater or not
  • Refinancing regardless of income or employment — a major difference from the HARP 2.0, which required full income and employment verification
  • The prohibition of up-front fees to refinance any loan they already guarantee, which is also in the best financial interests of Fannie Mae, Freddie Mac, and taxpayers as a whole
  • An accelerated housing market recovery

But HARP 3.0 will also bring forth a few cons if passed:

  • It would shift billions of dollars of financial risk from private lenders and banks to government entities (Read: taxpayers footing the bill).
  • Subprime loans ineligible for HARP 2.0 would still be ineligible for HARP 3.0.

“I would say that the only Con to the program is that it is not more far reaching,” said Oliver. “It leaves a very large majority of homeowners without any relief. It would seem the only options for these other homeowners would be to stay put, short sale, or eventually possibly foreclose.” 

All in all though — and as the above list of pros and cons shows — HARP 3.0 sounds very beneficial.

The Win-Win for Lenders

It turns out that mortgage loan borrowers are not the only group of people who would benefit from HARP 3.0. Lenders, too, would also profit.

According to Sharga, HARP 3.0 would be a windfall for mortgage loan lenders who are reliant on steady streams of refinances. The program would allow lenders to shift some of the risk of mortgage loans currently on their books to the government agencies, which would free up private lenders’ capital for other loans and investments. In effect, the program would be a win-win for banks and other private lenders who partake in lending home loans.

But all this being said, HARP 3.0 only has an estimated 20 percent chance of passing this initial committee hearing, and a meager 2 percent chance of actually being enacted — hardly a high sign of approval among Senators. In the House, it only has a 4 percent chance of passing an initial committee hearing and a 1 percent chance of being enacted.

Time will tell if the strings get cut before HARP 3.0 gets passed into legislation and what final form the program will assume.