At the peak of the American housing crisis (2007 – 2009), more than 16 million homeowners owed more on their mortgages than the houses were worth. Despite recovery in the economy, some 7.9 million so-called "underwater mortgages" are still causing Americans severe economic duress and for some, foreclosures. Over half of owners with underwater homes still owe more than 20 percent on their loans, according to Zillow's 2015 Q1 Negative Equity Report. It's going to take a lot of digging for many to climb out of the mess. But help is available.
What is an Underwater Mortgage?
A mortgage that has a balance exceeding the fair market value of the home is considered to be an "underwater mortgage." Homeowners with underwater mortgages can experience serious difficulties in selling their homes, have difficulty raising security to refinance their loan, or, in a worst-case scenario, face a short sale or foreclosure.
Take the owner of a home that cost $600,000. After making a down payment, the owner undertook a $500,000 mortgage to buy the property. Over the next few years, the appraised value of the home plummeted during a severe downturn in the housing market. The borrower hoped to move, but with the home valued at $320,000, it would sell for much less than the amount remaining on the mortgage. The home is underwater. The homeowner can't sell it and has difficulty making payments. It's the makings of a disaster.
The government has created solutions for underwater homeowners. But, according to CNBC, 3.2 million homeowners still owed more on their mortgages in 2016 than the appraised property value. Hardest hit with underwater mortgages are owners who own homes in the lowest 20 percent of their local markets, CNBC reported.
Why is Refinancing an Underwater Mortgage Beneficial?
For homeowners with underwater mortgages, conventional refinancing programs may be out of reach. Lenders in this market typically prefer to work with borrowers with at least 20% equity. Fortunately, federal programs were created as a result of the market crash to allow qualified homeowners to refinance underwater mortgages. For example, the federal Home Affordable Refinance Program (HARP) allows qualified borrowers to refinance original loans from 105 percent to 125 percent of the home's current value.
HARP refinancing an underwater mortgage allows homeowners to take advantage of lower interest rates, a range of new terms, and lower closing costs than those for traditional refinancing plans. To protect themselves from rising interest rates over the term of the refinanced mortgage, owners can change an adjustable-rate mortgage into a fixed-rate loan.
Underwater mortgage refinancing does not require owners to buy mortgage insurance, no matter how far they are under. Most refinancing plans do not require a new appraisal either, saving additional money. Borrowers with a high loan-to-value ratio or less than excellent credit can still qualify for federally backed underwater refinancing programs. It can also make monthly payments more affordable so owners can keep their homes. Fannie May reports that the average HARP refinanced mortgage saves homeowners $250 a month on house payments.
Underwater Mortgage Refinance: HARP & HAMP
Two federal programs – HARP and HAMP – were set up in 2009 during the subprime mortgage crisis to provide refinancing relief for troubled homeowners, providing mortgages at affordable rates. HARP loans are not available to homeowners in default; HAMP modifications are.
Here some key details of each plan:
The HARP Program
Under provisions of the Home Affordable Refinance Program (HARP), the home value doesn't matter of refinancing to a fixed-rate loan. Fannie May reports that the average HARP refinanced mortgage saves homeowners $250 a month on house payments, on average. According to the Federal Housing Finance Agency, there are 578,000 HARP-eligible loans in the United States that would qualify for refinance incentives. To apply, owners must:
- Have no delinquencies on their current loan for 30 or more days during the previous year.
- Have a mortgage guaranteed by Fannie Mae or Freddie Mac no later than May 31, 2009.
- Have a current loan-to-value ratio (LTV) of at least 80 percent.
- Owe less than 125 percent of the current market value of the home.
The federal government has extended the HARP program through December 2016. HARP lenders set their own rates, which is why consumers should compare offers when looking for an underwater mortgage lifeline.
The HAMP Program
Underwater homeowners who originally purchased their property using a VA, FHA, USDA, or a jumbo loan are ineligible for HARP loans. For them, the federal government created the Home Affordable Modification Program (HAMP). HAMP is also offered to qualifying homeowners through December 2016. According to Department of Housing and Urban Development (HUD), HAMP lowers the interest rate on the original mortgage, extends the term, and can reduce the principal. HUD reports an average reduction of monthly house payments by $500. To qualify for HAMP, homeowners should:
- Owe up to up to $729,750 on their primary residence.
- Have an initial loan originated on or before January 1, 2009.
- Have already been delinquent in payments or cannot afford the payments.
- Be underwater with a home that has a qualifying Loan-To-Value ratio (to receive a reduction on principal).
HARP and HAMP programs are created to help homeowners stave off potential foreclosures and certainly look less harmful on a credit score than having your home seized. This could be the right time for homeowners with underwater properties to consider a HARP or HAMP life preserver. There are no indications that these programs will be extended beyond the end of 2016, and with a national election on the way and a potential change in policy, financial assistance for homeowners who are underwater might also come to an end.