The Great American Swindle-Part Three–Mortgage Refinance Under HARP & HAMP (Homeowner Affordable Refinance Program) & (Home Affordable Modification Program)

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This 4 part blog reports on America’s indebtedness to the government.  Whether you are a young adult that attended college, an individual who needs health insurance, an American family that bought a home or a Senior Citizen you are probably being swindled by the government when it comes to your financial security.

Part three will examine the government program, HARP, to refinance mortgages that were underwater.  A mortgage becomes underwater when the value of the home is less than the mortgage or has no equity.  During the mortgage crisis, that began in 2007, nearly every home in America lost significant value. The government did what they always do, they threw money into a program to rescue banks from the impending mortgage catastrophe.

After the housing bubble burst homeowners were faced with the option of waiting until the market revived itself or letting go of their home.  Many homeowners walked away due to the fact they could not afford to make their payments.  Some people actually walked away because their home had zero equity and they did not want to make payments on an asset that had no value.

The problem started with banks and mortgage companies awarding mortgages to anyone and everyone.  It was so easy to get a mortgage that it seemed like the American Dream was a reality for everyone. Many of the loans were made with inflated home values and many loans were called “Liar Loans”.  These “Liar Loans” were made with little or no documentation and homebuyers were encouraged to lie about how much money they made or how long they had been employed.  Many people purchased homes they could not afford or bought more home than they could afford.   

The US government intervened in the crisis with a government programs known as HARP.  The basics of the program were a homeowner could refinance their mortgage regardless of how upside down the equity.  This was a good program for people who paid their mortgage every month or the homeowner that was behind a couple of payments. The government provided funds to lenders to rescue these homeowners.  Only in America would the government hand money to the very people that caused the problem and then ask that group to fix the problem.

The program expanded to include mortgage principal reductions or loan modification (HAMP).  As with all government projects, there was a massive amount of paperwork that had to be completed and no one really understood the program. The program was especially confusing for consumers and lenders acted very slowly in processing paperwork and making loan approval decisions. Many homeowners ended up losing their home since the process was very slow and inefficient.  Slow and inefficient is the best way to describe any government program designed to help people.

The idea was that banks would reduce the principal owed on a home and and create a lower payment that was affordable to the consumer.  The catch is that this principal reduction is actually still owed to the bank, this is called forbearance. You cannot sell your home for five years without paying it back in full.  After the five year period, it is amortized into the balance of the loan and most mortgages will have an additional ten years tacked on to cover this amount. One must remember nothing is ever free.  Many people did not read or understand their mortgage documents and did not fully understand the modification had to be repaid.  Many homeowners figured this out when they tried to sell their homes in a better real estate market.  They realized they had a large balloon payment to repay out of the proceeds of the sale.

The program did have a nice benefit for homeowners that could afford their home.  Many were able to take advantage of the refinance provision and refinance their loan with a much lower interest rate.  In many cases people took advantage of the significant savings and cut the length of their mortgages in half.  In other words, if you had 26 years left on your mortgage and you refinance to a significant lower rate (sometimes 4-5% less) you could refinance to a 15 year mortgage for the same monthly expense as the original mortgage.  I think this was an unintended consequence of the program.

Don’t get me wrong, HARP is a good worthy program and if it would have remained a program for refinancing mortgages that people could afford it would have been a great.  The tough part of the program was the loan modification (HAMP) that proved to be divisive. Many people worked hard for their homes and it seemed unfair that new buyers were going rewarded for not making their payments.  Many people did just that; they stopped paying their obligations and were rewarded by the government with a loan modification.

If the government had been doing it’s job, the mortgage crisis could have been averted. Unfortunately, Wall Street is a powerful influence on the government and no one was paying attention to the abnormal increases in real estate values. Many spoke out that the housing bubble was going to burst but the administration boasted that the economy was great and this was a normal housing trend.  As usual the government gave money to the very people that caused the problem (banks and lenders) and asked them to solve it with taxpayer money.  The kind of programs have caused the national debt to currently be more than 19 trillion dollars.

The lesson to be learned here is always seek advice from a CPA or tax advisor before you refinance your home. There can be as many pitfalls as advantages to refinancing. Since your home is one of your most valuable assets, always question everything.  Stan Mroz, CPA is a full service firm offering accounting, bookkeeping, tax and consultation services.  We have affordable rates to fit most any budget.

Part 4 will look at the pitfalls of reverse mortgages.  One of the biggest rip off to our seniors.