Sometimes government gets it right. The Urban Institute (UI) clearly thinks that
the Home Affordable Refinance Program, at least in its second iteration, was
one of those times. The history of HARP,
as the program is known, is the subject of a post in UI’s Urban Wire blog credited to four UI analysts*.
They say that, before 2009, borrowers who
had little or no equity in their homes could not refinance, even if their
mortgages were current. With home prices
plummeting, the number of homeowners in that situation was rapidly expanding
and many were stuck in loans with 6 percent or higher rates, even as current
rates fell below 4 percent. This cost
borrowers significant savings and deprived the struggling economy of much
In 2009, the two government sponsored
enterprises (GSEs) Fannie Mae and Freddie Mac, at the prompting of their
conservator and regulator, the Federal Housing Finance Agency (FHFA), took
their first crack at solving the problem, allowing GSE borrowers who lacked
sufficient or even any equity to refinance into lower interest HARP loans.
The program was not terribly
successful. UI says the rules the GSEs
and mortgage insurers (MIs) had put in place over the years to manage risk
locked out the very borrowers HARP was designed to help. In 2012 there was a redo which, in addition
to changing these rules, eliminated the cap on loan-to-value (LTV) ratios
UI calls the subsequent impact “huge”, and
HARP “arguably the most successful housing
policy initiative coming out of the crisis.” An FHFA refinance report says that
from 2009 to 2017 there were about 3.5 million refinances completed through the
program, with nearly 2 million, or 57 percent, completed in the two years
following the revamp. On average, refinancing reduced the loan rate by 1.66
points, and saved the borrower $200 per month. Aggregate savings thus far exceed
The program is limited to borrowers
with existing loans originated prior to 2009, a population that has dwindled in
recent years, so participation has dwindled as well. Ten thousand HARP
refinances were completed in second quarter of 2017 in comparison with over
300,000 at the peak in Q3 2012.
HARP was designed to expire at the
end of 2013, but that date has been extended several times. It is currently slated to end on December 31,
2018, with fewer loans anticipated going forward. FHFA estimated in March that
there were 143,000 borrowers who could still benefit from the program, a modest
number that probably overstates those who will participate, especially if
interest rates rise.
UI says the legacy of the program
goes beyond the borrowers who were helped and the money saved. “Overhauling the
original HARP program required policymakers and industry participants to cut
through prohibitive obstacles that not only held this program back, but slowed
refinancing down more broadly.” There
were three significant impediments in the original design.
- The new loans required a manual
appraisal, adding to the cost per loan and risks arising from committing to the
- Lenders had to secure new mortgage
insurance, again adding to costs and the risk that no mortgage insurer would take
on the risk of insuring a high LTV loan.
- Lenders didn’t want the risks
associated with the new loans which effectively limited borrowers to
refinancing with their existing lender. Without competition, borrowers would
see worse pricing and less savings.
The GSE’s and MIs had to recognize
that their rules were designed to mitigate risks in making new loans, not those
where they already held the credit risk. The GSE didn’t need to know with precision the
updated value of the property, the MI did not need to decide whether the risks
posed were worth backing, nor did they need to apply the same stringent
underwriting to filter out risk. They
already owned that risk. Indeed, to the extent the old rules kept borrowers from
participating in the program and reducing their monthly mortgage payment, the
GSEs and MIs were exposed to greater risk of borrower default.
With this in mind, policymakers
adjusted the rules:
- The GSEs produced appraisals through their automated
valuation system. This provided accurate-enough valuations for the
required mortgage-backed securities disclosures.
- Mortgage insurers transferred their coverage from the
old loan to the new one, avoiding all the costs and frictions of running
an entirely new approval process.
- The GSEs reduced the underwriting assurances they required
of lenders making HARP loans, even if the borrowers were coming from other
These steps allowed lenders to
automate their participation in HARP, both for their existing borrowers and
those currently serviced by other lenders. This led to a dramatic increase in
the number of borrowers who benefited and what they saved in doing so. By
expanding and deepening borrowers’ monthly savings, the GSEs benefited through
a reduction in default rates among many of their higher-risk borrowers.
UI says the HARP revamp was
instructive and the GSEs and FHFA are now going to apply the lessons learned to
their high-LTV lending in general. They will
remove those HARP hampering impediments from guidelines for refinancing all
borrowers who take out a loan backed by the GSEs after October 1, 2017. The changes will apply to those who have no
more than 5 percent equity in their home, and have been paying on time for at
least 15 months.
HARP was always intended to be temporary,
but the new GSE programs will be permanent. UI says the new rules will make it
easier for all borrowers who find themselves with little equity to refinance at
competitive rates, putting more money in their pockets each month, lowering the
risk to the GSEs and stimulating the economy. “And for that, we have HARP to
*Linda Goodman, Jim Parrot, Karan
Kaul, and Jun Zhu