Prospects for Increased Program Participation
On October 24, the Federal Housing Finance Agency (FHFA) announced that it will modify a number of borrower eligibility and lender participation requirements of Home Affordable Refinance Program (HARP) in an attempt to increase participation in the federal refinancing program.
HARP was implemented in 2009 in order to allow underwater homeowners the opportunity to refinance their home loans to lower mortgage interest rates. Many borrowers were eager to take advantage of the historically low rates, but were handicapped by their inability to meet some of the standards typically required to refinance, such as those that preclude borrowers with high loan-to-value loans. HARP was modeled – like several other Administration loss mitigation and foreclosure prevention programs started around the same time – to assist a very specific problem and class of homeowner. In HARP’s case, the target homeowner is one who wished to refinance his or her mortgage, but owes more on their mortgages than their individual homes are worth. Program administrators believed that underwater homeowners represented a substantial portion of the troubled homeowner populations, and that HARP would go a long way to stymie the accelerating wave of foreclosures flooding the nation’s housing market.
Unfortunately, HARP is viewed as unsuccessful by many industry experts, with the uptake numbers falling far below the FHFA’s initial program participant projections. While FHFA’s projections for the total number of borrowers that would have liked to participate in the program may have been accurate, the agency failed to predict the problems the program’s participation requirements would pose for lenders and borrowers alike. These barriers were primarily those put in place by the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, who were called on to administer the program.
Few borrowers were able to participate in HARP Phase I because upfront and closing costs were significant, and even borrowers that had the capital necessary to be eligible for the program were not guaranteed qualification. Upfront costs under HARP Phase I primarily stemmed from a requirement that, in order for a borrower to determine if he or she were eligible for the program, they were first required to pay for an appraisal of their property. In addition, eligible borrowers were charged relatively high closing costs when finalizing the refinancing process, including the purchase of new title insurance. In addition to these significant one-time costs lenders often charged borrowers with high loan-to-value (LTV) ratios “loan-level pricing adjustments” over the life of the mortgage; loan-level pricing adjustments increase a loan’s interest rate for borrowers that are perceived to represent a greater risk of default.
On the other side of the refinancing equation, lenders were adverse to refinancing loans with maximum LTVs greater than 100-105, thus neglecting the very borrowers HARP Phase I was intended to assist. Lenders were also hesitant to participate in the program because of the requirement that they make new representations and warranties (such as those certifying a borrower’s income and employment status) on high loan-to-value loans when the loans were sold to Fannie Mae and Freddie Mac.
To increase program uptake, FHFA announced it would seek to eliminate the standard appraisal requirements that made HARP refinancing impossible for many borrowers. To reduce the overall cost of the refinancing, FHFA announced it will waive loan-level price adjustments for borrowers. In addition, FHFA agreed to allow borrowers with loan-to-value ratios in excess of 125 percent to participate in the program, as they were previously excluded. To encourage greater lender participation in HARP Phase II, FHFA announced that it will ease the requirements for lenders to make new representations and warranties on HARP refinances. FHFA also announced that HARP Phase II will expire at the end of 2013, and loans originally sold to the GSEs on or before May 31, 2009 will be eligible.
Since last Monday’s announcement, many industry experts have said the program changes under HARP Phase II, especially the removal of the LTV ceiling, will open the door for homeowners with fixed-rate mortgages who were unable to refinance in the past. Mortgage Bankers Association (MBA) President and former FHA Commissioner David Stevens commented that the revamped HARP will reduce costs for borrowers, streamline the refinance process, and encourage lenders to more participate more actively in HARP. The program changes are especially welcome to industry advocates as they do not require congressional action and are thus able to go into effect almost instantaneously.
FHFA estimates that HARP refinances, assuming current market interest rates, could potentially double from the number of refinances that have occurred under HARP since its inception, a figure estimated at around 900,000.
How effective will the program changes be in increasing HARP’s uptake and reviving the housing market? Hard to say. While the new program requirements may make participating in the program easier, it is impossible yet to know if FHFA relaxed the specific restrictions that ruined the program’s appeal for borrowers and lenders originally. Lender participation, in particular, is arguably the most important aspect of the program, yet little was done in the program changes to incentivize this integral part of the equation.
The benefits the modified program might bring if it is wildly successful are obvious and many; from rehabilitating the stagnant housing market to stimulating the domestic economy and creating jobs. However, even if the program is heavily utilized as a result of the new changes, the qualifications still only permit a sliver of the population of the troubled housing market to gain access to this program. For example, borrowers that are no longer current on their mortgages (who total approximately 3.5 million) will still be unable to refinance under HARP Phase II.
FHFA said that by November 15, Fannie Mae and Freddie Mac will send operational instructions to lenders and servicers regarding the application process for the revised program; with the GSEs beginning to accept applications by this December.