Half-Time Report on HARP Largely Positive

News

The
Office of Inspector General (OIG) of the Federal Housing Finance
Agency (FHFA) has published an assessment of the Home Affordable
Refinance Program
(HARP) at what is presumed to be the midpoint of its
existence. HARP was designed to assist borrowers with existing
mortgages owned or guaranteed by Freddie Mac or Fannie Mae (the GSEs)
to refinance even where they had little or no equity, were
underwater, in their homes.

HARP
began in March 2009, a joint project of FHFA and the Treasury
Department. To qualify for the program under the guidelines for what
is now called HARP 1.0, a borrower had to be current on their monthly
mortgage payments and have a loan-to-value (LTV) ration of 105
percent or less (raised to 125 percent in the early days of the
program.)

When
HARP 1.0 was announced it was anticipated that four to five million
borrowers were eligible to refinance under the program, however by
September 2011 less than 1 million homeowners had done so. FHFA, the
GSEs, lenders, and other stakeholders identified several issues with
the program believed to be causing the
lackluster results:

  • Loans
    with
    LTVs
    greater
    than
    125%
    were
    not
    eligible
    for
    HARP
    1.0
    refinances;

  • The
    short
    program
    duration
    of
    approximately
    15
    months
    discouraged
    lenders
    from
    investing
    resources
    to
    market
    and
    originate
    HARP
    loans;

  • Representation
    and
    warranty
    liability
    deterred
    lender
    originations;

  • Manual
    property
    appraisals
    were
    required
    for
    the
    majority
    of
    originations;

  • Lenders
    were
    not
    permitted
    to
    solicit
    directly
    HARP-eligible
    borrowers
    for
    refinancing;
    and

  • Risk-based
    fees
    increased
    up-front
    borrower
    costs
    and
    diminished
    the
    benefit
    of
    a
    lower
    interest
    rate.

FHFA
directed
the
Enterprises
to
collaborate
with
stakeholders
to
address
these
concerns
and
improve
the
program.
After
several
modifications
were
agreed
upon,
FHFA
publicly
announced
them
in
October
2011,
rebranding
the
program
as
HARP
2.0.
Changes included removing the 125 percent LTV ceiling, extending the
duration of HARP by 18 months, eliminating the requirement for a
manual property appraisal, lowering the maximum amount of risk based
fees and revising lender solicitation guidelines, and allowing
lenders to offer incentives to borrowers. Later modifications to the
program included substantial representation and warranty relief for
lenders and reduced documentation requirements. FHFA also extended
HARP an additional two years, through December 31, 2015.

As
a result of the program modifications creating HARP 2.0 and the
subsequent changes, refinance volume has substantially increased. As
of March 2013 2.4 million HARP refinances had been completed.

 

 

OIG
said that the savings realized by borrowers each month through the
HARP refinance is an important outcome. By lowering the monthly
payment HARP reduces the risk of future default and potentially
stimulates the economy. According to Fannie Mae’s 2012 data, HARP
borrowers saved an average of $250 per month or $3,000 per year.

Another
outcome is the effect HARP has had on high-LTV loans. As lenders
began to implement the HARP 2.0 changes in early 2012, finance volume
for loans with LTVs between 105 percent and 125 percent began to
increase. Then in June 2012 the GSEs permitted lenders to include
HARP loans with LTVs greater than 125 percent into special
mortgage-backed securities (MBS) and refinance volume for these loans
dramatically increased.

 

 

HARP
was
also
designed
to
place
borrowers
in
more
stable
mortgage
and over 75 percent of HARP borrowers refinanced into fixed rate
mortgages with terms greater than 20 years while less than 1 percent
refinanced into less stable adjustable rate mortgages. Further, a
significant percentage of borrowers chose to refinance into shorter
term mortgages which allow them to more quickly build equity in their
homes.

 

 

Another
important dimension for HARP is the impact it has had on the GSEs.
OIG looked at the financial impact on them as a function of five
variables
, credit risk, guarantee fees, retained portfolio
investments, representation and warranty relief, and opportunity
cost. Some of these variables were found to be positive for the
GSEs finances, some negative or neutral.

The
credit risk associated with a HARP loan is intuitively lower than
that of its original counterpart because the new mortgage has, at
minimum, a lower interest rate, a lower payment, or a shorter
amortization period than the original and may also have been
refinanced into a more stable product. These conditions mean the
GSEs are likely to benefit from HARP.

Likewise,
guarantee fees are higher today than prior to 2009 and when a
pre-2009 loan is refinanced the GSEs are released from the earlier
g-fee structure and can securitize the refinanced loan and charge
today’s higher g-fee.

HARP
refinances negatively impact the GSEs’ retained portfolios because when
HARP eligible loans are refinanced (pre-paid) the GSEs no longer
receive interest payments on the original loan but purchase or
guarantee a loan with a lower interest rates and thus less value.
The effective cost to the GSEs is the difference in value from the
net interest rate spread between the original loans and the new
loans.

The
cost of representation and warranty relief is neutral. The waiver of
significant representation and warranty protection mandated by HARP
2.0 may negatively impact the GSEs, however the loans are seasoned
loans made to borrowers with demonstrated ability to repay so the
actual cost of eliminating the representations and warranties is
mitigated by the loan characteristics.

Opportunity
costs
are foregone because there is no need for HARP eligible
borrowers to acquire additional mortgage insurance or add equity to
their loans. Thus because HARP exists, the GSEs forgo the
opportunity to reduce their credit risk through enhancements or
relieve themselves of the loan entirely.

OIG
further assessed HARP by looking at FHFA’s administration of the
program
, analyzing performance data and program outcomes, and
identifying remaining program barriers. It found that FHFA’s
administration of HARP had included its active engagement of
stakeholders to identify and address program problems including
meeting with lenders, the GSEs, and mortgage insurers. To identify
issues confronting borrowers Fannie Mae conducted a comprehensive
survey of HARP-eligible borrowers in 2012 and the results of this
survey was shared with FHFA.

These
meetings with stakeholders resulted in the identification and
implementation of a number of improvements such as the level of
document required, aligning of same servicer and new lender
requirements to enhance competition for borrower business, issues
with representations and warranties, and aligning GSE requirements.

OIG
also noted that FHFA had sought to increase HARP volume by pursuing
state-level support for the program – working with state housing
finance agencies that receive funds from the Treasury’s Hardest Hit
Fund.

OIG
found that many of the barriers that earlier kept HARP from attaining
its goals have been substantially mitigated but there are still some
issues remaining related to borrower knowledge and understanding of
the program, origination and closing fees, lender placed mortgage
insurance, and lender capacity constraints. To address the borrower
knowledge issues, FHFA
has announced a nationwide public relations campaign to educate
borrowers about HARP. The campaign is specifically intended to
address the borrower misconceptions identified in the Fannie Mae
borrower survey such as believing they are not eligible for the
program or that they have to use an unfamiliar lender.

OIG
concludes that, with
over
two
years
left
in
the
program,
it
is
difficult
to
project
how
many
HARP-eligible
loans
ultimately
will
be
refinanced
because,
among
other
factors,
educating
borrowers
and
encouraging
their
participation
continue
to
be
major
challenges.

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