Why HARP 1.0 Failed

In February 2009 President Obama announced his three-pronged attack on the nation's failing housing market. One-third of his battle plan was a low-cost refinance program aimed at responsible homeowners called HARP.

HARP was intended to allow millions of homeowners to refinance at near historic low interest rates as long they had made a downpayment when they purchased their home, were making monthly payments on time but through no fault of their own had lost their equity due to sharp declines in home prices. HARP would allow millions of homeowners to save thousands each year with a HARP refinanced mortgage.

At the time, homeowners with less than 20 percent equity had a nearly impossible shot at refinancing. This new plan, dubbed the Home Affordable Refinance Plan (HARP), would allow borrowers with Fannie Mae or Freddie Mac-backed loans to refinance, even if they had little equity, even if they had negative equity.

Here's the details of the 2009 HARP program:

Your mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac (no FHA, VA or USDA loans permitted)
You must be current on your mortgage and have not been more than 30 days late on a mortgage payment in the last year
The loan-to-value (LTV) ratio on your first mortgage can't exceed 105 percent (the LTV limit was raised to 125 percent on July 1, 2009)
You must exhibit the ability to make the new payments which must also improve the long-term outlook of your mortgage

HARP's stated goal was to help 4 to 5 million borrowers refinance. While application volume was through the roof, the number of approved loans as of August 2011 was only 893,800.

HARP failed because lenders weren't as interested in HARP as the administration hoped they'd be. Despite the July 2009 LTV increase to 125 percent, most lenders had capped their own LTV limits at 105 percent.

Private mortgage insurance proved to be a huge problem. Borrowers who still had PMI at the time of their HARP application were required to get the same amount of coverage for their newly refinanced loan. The problem was, the struggling mortgage insurance industry wasn't interested in writing new policies for underwater homeowners.

High closing costs and fees, the need for new appraisals and countless reports of lost paperwork all contributed to hundreds of thousands, if not millions, of applications stamped “denied.”