In an attempt to help “underwater” homeowners (those borrowers whose homes are worth less than the amount mortgaged) refinance, the Federal Housing Finance Agency (FHFA) announced plans on Oct. 24 to overhaul the Home Affordable Refinance Program (HARP). Ideally, these changes will enable qualified homeowners, who are up-to-date on their mortgage payments, to refinance their loans into a lower interest rate and/or more stable mortgage product.

If these program changes work as planned, it is believed that the number of possible foreclosures will be reduced, and homeowners will have extra money to spend on other items, thereby, boosting the economy. Additionally, homeowners will be able to refinance into shorter-term mortgages, which means they’ll be able to pay off the balance owed quicker by reducing the term of their loan.

Changes to the program include:

• Removing the previous loan-to-value limits, which were set at 125%.
• Eliminating the need for a new property appraisal and loan underwriting.
• Eliminating certain risk-based fees for borrowers who refinance into shorter-term loans and reducing fees for other borrowers.
• Extending the HARP refinance deadline date to Dec. 31, 2013.

The eligibility criteria include:

• The existing mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
• This program is available for loans with current loan-to-value ratios above 80%.
• Borrowers must be current on their mortgage payments. You can have no late payments in the past six months and no more than one late payment in the past 12 months.
• If your mortgage was previously refinanced under HARP, you are not qualified to refinance under these program changes.

The original HARP program was supposed to have helped 4-5 million homeowners; however, it has only helped about 894,000 borrowers. The FHFA estimates that by the end of 2013 HARP refinances could help as many as one million underwater homeowners.

But critics say this will barely make a dent when 11 million mortgages, or 23% of all home loans, are underwater, according to CoreLogic, a housing research firm.

Also, due to HARP’s flat results during its first three years, many people are skeptical about this new initiative.

“With negative equity at 26.8% and un- and under-employment at 16.5% in September, most foreclosures are occurring because of a household’s inability to pay the mortgage or sell the house. So, modest decreases in a monthly mortgage payment won’t do much to solve this fundamental underlying issue,” said Zillow Chief Economist Stan Humphries.

“But, for households that can pay their mortgages this will reduce their mortgage payments, therefore helping them to repair their balance sheets by putting more money in their pocket. In short, I don’t think this will materially reduce the expected number of defaults, but it will be a strong economic stimulus that is relatively revenue neutral.”

The FHFA is expected to publish the final changes to HARP in November. To take advantage of this program, you need to determine if your mortgage is owned by Fannie Mae or Freddie Mac, and you meet the eligibility requirements. If so, you should contact your existing lender or any other mortgage lender offering HARP refinances.