White House efforts to push widespread refinancing of mortgages for homeowners who owe more than their properties are worth may be limited by banks’ stretched capacity to originate loans and their concerns that the borrowers are too risky.
By the end of May, 78,000 homeowners with mortgages at least 5 percent larger than the value of their homes had refinanced into lower interest rates under the new rules for the Home Affordable Refinance Program, the Federal Housing Finance Agency reported yesterday. Of those, 11,000 borrowers were defined by the agency as deeply underwater, owing at least 125 percent of their homes’ value.
About 2.3 million borrowers with loans backed by Fannie Mae and Freddie Mac might be eligible for the expanded program, which took effect in January, because they are underwater on their loans or have almost no equity in their homes, according to data provider CoreLogic.
“There’s a huge subset of the exact borrowers they originally wanted to reach who they just haven’t been able to reach largely because the banks are not incentivized to take on these loans,” Isaac Boltansky, Washington policy analyst at Compass Point Research & Trading LLC, said in an interview.
The constraints extend to President Barack Obama’s separate effort to bolster refinancing of loans insured by the Federal Housing Administration. On June 11, the FHA reduced fees in its so-called streamline refinance program, which allows borrowers who are current on their loans to obtain lower interest rates without income verification or appraisals.
Lenders including Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. have said they will accept FHA streamline applications only from clients whose loans they currently service, citing an inability to keep up with demand. Banks also are turning away applications for HARP loans for all except current clients because they say they are worried about liability if the loans sour.
“The real limitation is that for one reason or another the programs seem to be limited to the existing servicer of your loan,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter. “The government really thought it could get around that and create more of a competitive market but that really hasn’t happened.”
The Obama administration this year has called for a widespread refinancing effort to save homeowners an average of $3,000 year if they obtain rates as low as 3.65 percent on a 30-year fixed-rate mortgage. The White House, saying Republicans in Congress are unlikely to move on initiatives that would require legislative approval, the administration has been focused on expanding existing programs that have not reached as many borrowers as proponents expected.
HARP, which been used by 1.3 million borrowers whose loans are backed by Fannie Mae and Freddie Mac, was supposed to reach as many as 4 million borrowers when it was introduced in early 2009. The new version, known as HARP 2.0, offers lenders liability protection on loans they refinance for existing customers. The FHA also offered lenders expanded protection by promising not to count loans in the streamline refinance program in their comparisons of bank performance.
That has not stopped banks that are concerned about the risks of refinancing an underwater loan from turning away borrowers who might be eligible on paper for a government-backed refinancing, said Dan Green, a Cincinnati, Ohio-based loan officer who blogs about federal loan programs and works for Waterstone Mortgage Corp. of Wauwatosa, Wisconsin.
“The government keeps rolling out these wonderful programs to help people who have lost equity, and it’s sometimes hard to find a bank that will underwrite to the government guidelines,” Green said in an interview. “There’s a disconnect between how the program is being touted and what a homeowner can actually receive.”
Some lenders are requiring higher credit scores than the minimum necessary or are asking for appraisals even on streamline refinances, according to Boltansky and other housing industry analysts.
The HARP program accounted for about a fifth of the 341,209 refinances of loans backed by Fannie Mae and Freddie Mac in May, FHFA said. The volume of mortgage refinancings backed by the two government-sponsored enterprises is down from March, when it reached almost 500,000.
The government agencies in charge of the programs say they are pleased with the results so far.
As of May, the number of HARP refinances for underwater borrowers had passed the amount for all of 2011, the FHFA said.
“These numbers show HARP 2.0 is accomplishing the goals set forth -- to provide relief to borrowers who might otherwise be unable to refinance due to house price declines,” Edward J. DeMarco, acting director of the FHFA, said yesterday in a statement.
David Stevens, president of the Mortgage Bankers Association, said the program seems to be most effective in states with the steepest home-price declines. More than half of borrowers who obtained HARP loans in Nevada in May were underwater, the FHFA reported. At the same time, the percent of refinances in the state that were done through HARP surged to 48 percent in May after averaging 27 percent over the past three years, the FHFA reported.
“The significant increase in the percent of loans coming from Nevada that are HARP shows that at least at some level, the eligible population is clearly seeing a lift as a result of these HARP enhancements,” Stevens said in an interview.
The Federal Housing Administration is “continuing to see strong interest in the streamline product,” Brian Sullivan, an agency spokesman, said in an e-mail.
Since fees and premiums were cut, 74,757 people have applied for a streamlined refinance, Sullivan said. The agency estimated that the recent price cuts could expand the reach of the program by 3.4 million households paying interest rates higher than 5 percent.
The effect of the refinancing programs may be limited, but they are doing better than critics expected, Cecala said.
“From the mortgage industry standpoint, there was some skepticism about whether either of these programs would be a big hit and show much traction,” Cecala said. “The feeling is they are going to meet and surpass expectations, but that doesn’t mean everybody in the U.S. is going to be able to refinance an underwater mortgage.”