The Problem With HARP

By Eddie Speed, Editor, REal Income Alert

Last Thursday I showed you how the real-estate recovery isn’t all it’s blown up to be… that the reality is downright scary and you’d be better off ignoring the headlines.

I also said, based on the numbers I’ve seen and the ones I showed you, that: “During my 32 years in the real-estate industry I’ve never seen an opportunity to buy certain assets at such low prices.”

Besides all the foreclosures, delinquencies, defaults and low property prices, the government’s HARP program is another factor working in our favor.

HARP stands for the Home Affordable Refinance Program, which allows borrowers on a delinquent loan to apply for refinancing. As I also mentioned last week, it allows statisticians to fudge the market numbers even further because as soon as the paperwork is filed, that loan is no longer considered delinquent.

The problem is, while HARP helped the numbers looked better, it did nothing to solve the underlying problem.

The program has gone through numerous revisions since its initial missteps. The original version simply didn’t work because most people failed to meet the qualifications.

HARP 2.0 made it easier for homeowners to qualify so the number of HARP loans soared in 2012 and continued to grow in 2013. Today, several million homeowners have received HARP loan modifications.

Here’s a chart of the situation in 2012…

See larger image

But you have to look past the surface story.

According to the credit reporting agency TransUnion, over 60% of all loan modifications through HARP re-default within 18 months.

A closer look at the graph above shows at least one reason why: These HARP loans are modifying mortgages that are already upside down!

Without offering debt forgiveness, the benefits of saving $100 to $200 a month on a modified interest rate (typically 3% to 5%) and delaying foreclosure are not enough of a long-term incentive to convince these homeowners to continue paying.

If that sounds eerily similar to what happened before the last real-estate financing crash, it’s because it is. But we survived that collapse, and we’re here to help you survive this one.

That’s why, next week, I’ll share the good news with you.

Categories: Housing Market

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