A U.S. government plan to help borrowers get lower-interest mortgages for their devalued homes drew praise from banks including Wells Fargo & Co. while bond traders braced for a wave of refinancings.
The Federal Housing Finance Agency said yesterday it would allow qualified homeowners to refinance no matter how much their homes have declined in value, expanding the terms of the 2009 Home Affordable Refinance Program. The agency, which oversees Fannie Mae and Freddie Mac, said it would also eliminate some fees, reduce others and waive some risk for lenders.
After Edward J. DeMarco, the agency’s acting director, announced the program, President Barack Obama took the news to Nevada, where he acknowledged that HARP’s refinements and other government efforts weren’t enough on their own to revive home sales or the economy.
“These steps I’ve highlighted today will not solve all the problems in the housing market,” Obama said. “Given the magnitude of the housing bubble and the huge inventory of unsold homes in places like Nevada, it will take time to solve these challenges.”
The original HARP program had a goal of reaching 5 million borrowers. As of August, fewer than 895,000 loans had been refinanced. That number could double by the end of 2013 under the expanded program, according to an FHFA projection.
Meg Burns, FHFA’s senior associate director, cautioned that most of the nation’s nearly 11 million underwater borrowers won’t be able to take advantage of the program.
“The majority of people underwater looking for help don’t have loans backed by Fannie Mae and Freddie Mac,” Burns said in an interview. “We don’t have a really large pool of underwater, current borrowers in certain places.”
Ethan Handelman, a vice president at the National Housing Conference, a non-profit coalition of banks and consumer groups, noted that many obstacles remain for the mortgage market.
“It’s a good step,” he said of the HARP expansion. “It’s not the silver bullet for fixing housing.”
HARP was designed to help borrowers with loans that were sold to Fannie Mae or Freddie Mac before June 2009 and who have stayed current on their payments even as their homes’ value has plummeted. Initially limited to mortgages no greater than 125 percent of a home’s value, the program now is open to any underwater borrower who qualifies. Mortgages must be worth at least 80 percent of a property’s value to be refinanced. The program expires at the end of 2013.
“We believe these changes will make it easier for more people to refinance their mortgage,” DeMarco said.
Falling home prices continue to dog the broader economy by eroding wealth, stifling spending and triggering foreclosures. HARP could give new options to some borrowers in Nevada, California and Arizona, where home values have suffered the steepest declines. Sixty percent of Nevada homeowners are underwater, some owing more than twice what their homes are worth.
“Breaking this vicious cycle is one of the most pressing issues facing policy makers,” Federal Reserve Bank of New York President William C. Dudley said yesterday in remarks at Fordham University in the Bronx, New York.
The HARP revamp is part of a mosaic of efforts the government is making to boost home prices and consumer spending. Housing and Urban Development Secretary Shaun Donovan said underwater borrowers who refinance into current rates as low as 4 percent from 5 percent and 6 percent could save as much as $2,500 a year, he said.
“It’s the equivalent of a tax cut for these families,” Donovan said.
‘Go Out and Spend’
John Stumpf, chief executive officer of Wells Fargo, the nation’s biggest home lender, said the plan could save homeowners $200 a month on average.
“This could really be helpful,” Stumpf said yesterday at a press club lunch in Atlanta. “They’ll go out and spend and get this economy going again.”
JPMorgan Chase & Co.’s mortgage chief, Frank Bisignano, said in a statement released by the bank that reducing a mortgage payment by $2,500 a year could improve a family’s quality of life.
Following yesterday’s announcement, Fannie Mae’s 6 percent, 30-year fixed-rate bonds led declines, underperforming Treasuries by the most in 20 months. The drop came even after a four-month slump, signaling Wall Street was surprised by the aggressiveness of the Obama administration’s announcement.
Loans larger than 125 percent of a property’s value can’t be pooled into traditional mortgage bonds issued by Fannie Mae and Freddie Mac. The companies will have to hold those high loan-to-value mortgages on their books or find a new way to sell them.
“Can we find an investor who is not a traditional mortgage-backed security investor to be interested in these types of loans? We hope so,” Burns said.
The refinements will encourage more lenders to participate, DeMarco said. Lenders can’t be faulted for a bad appraisal, for example, because under the new program they won’t be required in most cases, he said.
“This is substantial relief from representations and warranties,” DeMarco told reporters on a conference call.
Mortgage lenders are “particularly gratified” at that change to the plan, said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association in Washington and former FHA commissioner. “These changes alone should encourage lenders to more actively participate.”
Promising HARP lenders a break from warranties is an about-face for Fannie Mae and Freddie Mac. The companies can revoke their guarantees for even minor infractions and force lenders to buy back loans deemed defective. The companies have increased buyback demands as they aggressively work to control costs.
“This is a Titanic shift for FHFA to remove this kind of leverage,” said Tim Rood, managing director of the Collingwood Group LLC, a Washington-based consulting firm.
The program was refined after long negotiation with lenders, mortgage insurers and real estate title companies, Donovan said. Second-lien holders agreed to automatically resubordinate their debts to new HARP loans, title companies will lower closing costs and mortgage insurers will transfer coverage of old loans, he said.
Risk-based fees will be eliminated for borrowers who refinance into 20-year or shorter loans, DeMarco said. The faster amortization of those lowers risk for Fannie Mae and Freddie Mac, which rely on taxpayer support to operate.
Shorter loan terms also carry lower interest rates and pay down debt faster, and “allow homeowners to get above water more quickly,” Donovan said.
Lawmakers welcomed the news, with some asking the administration to go further.
“We must not stop here,” said Representative Elijah E. Cummings of Maryland, the top Democrat on the Oversight and Government Reform Committee. “Economists warn that the housing crisis is ‘ground zero’ for the economy and jobs, and this is only one modest step towards addressing it.”