When the Treasury Department launched its Home Affordable Refinance Program (HARP) in March 2009, there were hopes that it could help as many as five million borrowers. Two and a half years later, the actual number remains under a million. Now, the Obama Administration is hoping to breathe new life into the program with some targeted tweaks:
- Eliminating or lowering borrower fees
- Removing the 125 percent loan-to-value ceiling
- Waiving appraisals when a reliable AVM (automated valuation model) is available
- Waiving some representations and warranties for lenders
That last item is causing ripples in the mortgage industry: It means loan originators can sell the new refinanced loans to Fannie Mae or Freddie Mac without fear of the “buy back” provisions present in most mortgage loans. Those mechanisms require loan originators to buy back loans they've sold when defaults reach a certain level. As big mortgage servicers such as Bank of America have experienced, that put-back risk can be crippling when defaults are abnormally high.
The hope is that lenders will jump at the chance to write new refi loans without risk. Homeowners will potentially save thousands of dollars a year in reduced payments, stimulating the economy much as a large tax cut would. More importantly, the improved loan terms will hopefully reduce the temptation of strategic default for homeowners that are underwater.
Each of these presumptions has been challenged by observers, who point out that:
- Fannie already has a program that waives reps and warrants provisions. Thus, the newly-stated policy won’t affect the refinance rate for Fannie Mae loans.
- In the current depressed economy, homeowners will use any savings to pay down other debts and obligations, so the stimulus effect will be minimal.
- The main driver of strategic default is principal balances that exceed home values. HARP doesn’t address that.
Another Bank Bailout?
Removing the risk for loan originators means that risk is simply transferred to Fannie and Freddie, the buyers of the new loans. Thus, the U.S. taxpayer will be on the hook for the banks’ misfortunes—again.
The government replies that only loans sold to Fannie and Freddie before June 2009 are eligible. Those are considered “seasoned loans”, meaning that if they were going to default they already would have. Given the continued slide of home prices and persistent unemployment, that assumption may be faulty as well.
For the million or so homeowners it may actually reach, the new HARP will surely be a blessing. For the rest of the country—the jury is still out.