Lenders are becoming more willing to offer new loans to borrowers who don’t have any home equity after changes to the rules of the U.S. government’s Home Affordable Refinance Program.
President Barack Obama has made expanding the reach of HARP a centerpiece of his housing policy, most recently calling for Congress to pass a bill making the program more attractive to lenders in his Feb. 12 State of the Union address. Senate Democrats Barbara Boxer of California and Robert Menendez of New Jersey introduced a bill in February that would implement the president’s request.
Even without that legislation, policy changes that went into effect last year and at the beginning of this year are starting to help more borrowers, say analysts including Kevin Barker of Washington-based Compass Point Research & Trading LLC.
“At first we thought Boxer-Menendez would be the catalyst” for banks to expand HARP lending to new clients, Barker said in an interview, referring to the bill written by the two senators. “However, it seems that the new rules have made banks more willing to take the risk.”
HARP assists borrowers with mortgages backed by government- owned Fannie Mae (FNMA) or Freddie Mac, allowing them to cut their loan payments by refinancing at today’s low interest rates even if they are stuck in homes that have lost value. Many are paying interest rates as high as 6 percent, compared with the current average 30-year fixed rate of 3.52 percent.
The biggest stumbling block for borrowers has been lenders’ unwillingness to originate HARP loans for anyone other than existing customers. That’s because banks were potentially liable when new clients defaulted on HARP loans and weren’t liable when existing customers were unable to make payments.
Typically, Fannie Mae and Freddie Mac demand repurchases when they find that defaulted loans had flawed underwriting. The companies, which have been under U.S. conservatorship since 2008, buy mortgages and package them into securities on which they guarantee payments of principal and interest.
The largest banks -- including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) -- charged a premium for HARP loans to borrowers whose mortgages they serviced because those people couldn’t turn anywhere else, according to an analysis last year by Laurie Goodman of Austin, Texas-based Amherst Securities Group.
In September, Fannie Mae, Freddie Mac and their regulator, the Federal Housing Finance Agency, changed the rules, announcing they wouldn’t go after the banks for failing to properly value a property when they originated HARP loans for both new and existing clients, as long as the lenders obtained an appraisal.
During an interview at Bloomberg’s New York headquarters in January, Quicken Loans Chief Executive Officer Bill Emerson called the policy change a “line of demarcation” that encouraged Quicken to do more HARP refinancing.
Between a quarter and a third of Fannie Mae HARP refinances involve a borrower switching to a new servicer; at Freddie Mac (FMCC), it’s between 20 and 25 percent.
The proportion will probably continue to increase, especially after another rule change that went into effect in January, company officials say. Now, Fannie Mae and Freddie Mac won’t force banks to buy back HARP loans that default as long as the homeowners make 12 months of on-time payments, even if the borrowers aren’t the banks’ existing clients.
Through the first three quarters of 2012, there was “a general upward trend in the different servicer business,” said John Forlines, Fannie Mae’s chief credit officer for single- family housing. “We continually hear from lenders that they’re removing overlays particularly in the different-servicer space.”
HARP loans began to surge last year and now account for almost a third of all refinancings, according to the Mortgage Bankers Association. Nearly 1.1 million borrowers used HARP last year alone, equaling the 1.1 million in the first three years of the program combined.
FHFA data show that servicers are offering HARP loans to an increasing number of the riskiest borrowers. Overall, about a quarter of HARP loans have gone to borrowers who owe more than their properties are worth. In December, nearly half of HARP refinancings were for such underwater borrowers.
There may be as many as 2 million eligible borrowers who haven’t taken advantage of HARP yet, Bank of America Merrill Lynch analysts said.
To qualify, homeowners must have loans that were originated before June 1, 2009, and be current on their payments. The program is scheduled to expire at the end of this year.
Changes in the program rules are just one explanation for the growing reach of HARP. Another factor is that it’s getting harder for lenders to make money originating traditional mortgages.
The amount that lenders make from packaging loans into securities and selling them to investors may be down as much as 40 percent from last quarter, Barker estimates. Meanwhile, securities containing HARP loans bring higher yields because borrowers are less likely to refinance again, preserving the value of the investment.
“A HARP borrower is not as price-sensitive as a regular refinance because they already have a high interest rate on their loan and there are not many banks offering a HARP refi to that particular borrower,” Barker said. “At the same time, an originator can sell it into the secondary market for a higher yield.”
Meanwhile, banks have increased staffing in their lending departments and are soliciting potential HARP borrowers for the first time, Forlines said.
“They actually have the capacity to be able to handle more volume, whereas many of them last year were more reactive to whatever borrowers were calling in,” he said.
Even as the conditions for HARP begin to ease, lawmakers are still moving forward with legislation. The Menendez-Boxer bill would remove the risk that lenders would have to buy back defaulted HARP loans issued to borrowers who aren’t current clients. That goes further than the FHFA rule that removes the risk after a year of on-time payments.
“While we’ve applauded the changes made to the HARP program and believe they are a step in the right direction, there still remains nearly 12 million Fannie and Freddie borrowers current on their payments who could benefit from a refinance,” Menendez said in a statement. “The successes of the program to date illustrate the need to eliminate the remaining barriers keeping borrowers from refinancing at today’s low rates.”
The bill would also extend the deadline for applying for a HARP refinancing by one year, to the end of 2014. Analysts say they aren’t sure that’s necessary at the current rate that HARP loans are being originated.
“We expect most of the eligible creditworthy borrowers to be refinanced by the current deadline,” Bank of America Merrill Lynch analysts wrote in a Feb. 8 note to clients.
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