A U.S. program to help as many as 5 million homeowners refinance their mortgages is being hindered by reluctant lenders, suffering a similar fate to the government’s main foreclosure-prevention effort.
The Obama administration introduced the plan in April 2009 in a bid to prevent defaults among borrowers who were current on their payments but had little or no equity after the average home price had tumbled 33 percent since the July 2006 peak. The Home Affordable Refinance Program, known as HARP, was designed to allow these homeowners, who usually can’t qualify for new loans, to benefit from the lower rates engineered by the Federal Reserve to help stimulate the economy.
About 810,000 homeowners refinanced through HARP as of May, according to the Federal Housing Finance Agency, far short of the administration’s goal. The program’s limited impact threatens to prolong the nation’s foreclosure crisis while keeping billions of dollars out of consumers’ hands -- money that could flow into the economy in the form of additional spending or investment.
“Of all the policy ideas to help the housing market in the very near term, juicing up HARP has the most potential for success,” Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, said in an e-mail.
The program is open to borrowers with loans owned or backed by Fannie Mae or Freddie Mac and who have equity ranging from negative 25 percent of their home’s value to positive 20 percent. Negative equity, known as being underwater, is when the mortgage is bigger than the value of the property.
HARP has fallen short of targets because banks are focusing on borrowers with the most equity and the least risk, said Derek Chen, a mortgage-bond analyst at Barclays Capital in New York.
From the start of the program through May, 57,171 HARP-refinanced loans, or 7 percent, were more than 5 percent underwater, according to the Federal Housing Finance Agency in Washington, which regulates Fannie Mae and Freddie Mac. The rest ranged from negative 5 percent to positive 20 percent equity.
HARP, which was scheduled to expire in June, was extended by the housing finance agency for another year in March.
“I don’t think by most measures that it’s a success,” said Guy Cecala, publisher of Bethesda, Maryland-based trade publication Inside Mortgage Finance. “It’s a combination of reluctance by lenders to embrace the program and a number of borrowers who don’t qualify for some reason or the other.”
Mortgage Insurance Obstacle
Shannon and Keith Kinder, a suburban Atlanta couple, meet HARP guidelines. They’re current on their mortgage, which is about 15 percent underwater after they put down 15 percent in 2006 to buy their $228,000 custom home in Social Circle, Georgia, according to Shannon Kinder.
She said OneWest Bank, which services their loan, refused to qualify them for HARP because they have mortgage insurance, which is required for homebuyers with less than 20 percent equity. That’s left them stuck in a 30-year mortgage at 6.75 percent. The average 30-year rate was 4.32 percent as of Aug. 11, the lowest since reaching a record 4.17 percent in the week ended Nov. 11.
“It’s frustrating,” Kinder, 44, said in a telephone interview. “My mortgage company knows my name because I’ve talked to so many people there.”
David Isaacs, a spokesman for Pasadena, California-based OneWest, declined to comment on the Kinder’s effort to refinance.
The idea behind HARP was that Fannie Mae and Freddie Mac, which were taken over by the government in 2008 to prevent their failure, wouldn’t be taking on additional risk because they’re already guaranteeing the mortgages they’d refinance. Borrowers - - especially those with adjustable mortgages that may reset to higher rates -- are less likely to walk away from their obligations if they can reduce their costs, Zandi of Moody’s Analytics said.
Banks have been reluctant to offer new loans to underwater homeowners because of worries that Fannie Mae and Freddie Mac will seek to force lenders to buy back mortgages that go into default soon after refinancing, Chen of Barclays Capital said. Homeowners with private-mortgage insurance are also being turned down because of the cost and delays associated with transferring the policy to the new loan, he said.
Mortgage originators are less likely to approve a HARP refinancing if they’re not servicing the loan because of the complicated process involved and the perceived risks, according to Michelle Murphy, senior policy analyst for housing and regulatory policy at the Federal Housing Finance Agency.
Keane Ng, a loan officer with Cobalt Mortgage Inc. in Kirkland, Washington, has collected about 300 virtual signatures since starting an online petition last October to pressure banks to approve borrowers with mortgage insurance for HARP refinancing.
“Some of the banks are just cherry-picking the easy ones, and the HARP loans with insurance are not easy,” Ng said.
While the Mortgage Bankers Association hasn’t taken a position on proposals to boost refinancings, the Obama administration should reconsider them given the weaker-than-expected economy, said David H. Stevens, president of the Washington-based trade group and head of the Federal Housing Administration until March.
“We are not recommending a mass refi without consideration of the associated risk,” Stevens said. “We are hearing there has been an increase in HARP activity and more demand for the program with some of the major institutions. It takes time for any new product to get off the ground.”
Increasing the number of people who can refinance would be a cost-efficient way to pump up the economy, said Chris Mayer, a professor at Columbia Business School in New York, who advocates making more underwater borrowers eligible for new loans.
$400 Monthly Savings
“This is a stimulus for the economy,” Mayer said in a telephone interview. “If we’re successful in doing a mass refi, it could reduce payments for 25 million households. It’s like a permanent tax reduction with a minimal impact on the deficit.”
The Federal Reserve pledged on Aug. 9 to hold interest rates at current levels through at least mid-2013 to counter the weaker-than-expected economic recovery.
A homeowner with a $300,000 mortgage at 6.5 percent could save about $150,000 over 30 years by refinancing at current interest rates, or more than $400 a month.
“The Fed is running a very accommodative monetary policy and market rates have declined significantly,” David Greenlaw, chief financial economist at Morgan Stanley in New York. “But the economy is not reaping the benefits of the low-rate environment.”
Zandi supports a bill introduced in January by Senator Barbara Boxer of California to expand HARP, removing the cap on negative equity and exempting the program from risk-based fees charged by Fannie Mae and Freddie Mac. The mortgage-finance companies would also be required to inform all of their borrowers that the program is available.
The fees, which are imposed to compensate for lower credit scores and other credit-risk characteristics, can add as much as 2 percent to the cost of a loan, according to a statement from Boxer, a Democrat. The bill would help up to 2 million more borrowers lower monthly payments and pump $2.2 billion annually into the economy, the senator’s office said.
The House of Representatives, dominated by Republicans, voted in March to abolish the Treasury’s loan-modification program, which has been criticized by members of both parties for being ineffective. The Home Affordable Modification Program, or HAMP, pays banks and servicers to modify monthly payments for delinquent borrowers. It’s yielded about 657,000 permanent modifications, fewer than the initial projections of as many as 4 million.
HAMP has been plagued by consumer complaints about lost paperwork and servicer delays and restrictive eligibility requirements.
Republicans in Congress are unlikely to allow a proposal such as Boxer’s to advance because it injects the government more deeply into business, said Jaret Seiberg, a financial-services policy analyst at MF Global Holdings Ltd.’s Washington Research Group.
Seiberg said the bill could backfire and push up rates for all borrowers. Investors in mortgage-backed securities would demand higher yields to compensate for added uncertainty caused by the increase in HARP homeowners refinancing and paying off their original loans early, he said.
“There are real questions whether there would be any benefits and we know there will be a lot of costs,” Seiberg said.
The Boxer proposal, which was co-sponsored by Republican Johnny Isakson of Georgia, could also be passed as an amendment to a larger bill or be implemented by the Obama administration without legislation, said Zachary Coile, a spokesman for Boxer.
Mayer said Fannie Mae and Freddie Mac could eliminate investors’ concerns by including in newly issued bond contracts a restriction on future mass refinance programs. Lenders could be appeased by indemnifying them for the underwriting problems inherited from the original loans, Mayer said.
A streamlined refinance program proposed by Mayer and fellow Columbia professor Glenn Hubbard was the model for a bill first introduced by Representative Dennis Cardoza of California in 2009. Appraisals, income verification and other paperwork that is now bogging down HARP wouldn’t be required and closing costs could be wrapped into the interest rate that borrowers pay, Mayer said.
Fannie Mae and Freddie Mac could face a one-time loss of $40 billion to $60 billion because the new HARP loans would pay lower interest rates, Mayer said. The cost would be offset by fewer defaults and it would put $50 billion to $70 billion a year in homeowners’ pockets, he said.
“Nothing else has really succeeded,” Mayer said. “So why not try to provide a stimulus at a moderate cost to the government and do something to benefit homeowners?”
Kirk Chivas, chief operating officer for First Commerce Financial, a mortgage broker in Wixom, Michigan, said HARP’s success is vital because it’s one of only a few lifelines for responsible borrowers.
“When people who have great credit and pay bills on time complain to me, ‘Where is my bailout?’ I say this is your program,” said Chivas, who’s helped more than 100 borrowers refinance through HARP.