Urban Wire HARP has been a huge success; further action on the refinancing front is unlikely
Laurie Goodman
Display Date

Media Name: shutterstock_104946530.jpg

As the dust settles on President Obama’s speech in Phoenix, it is useful to take a closer look some of its components. My colleague Jim Parrott focused on the access to credit and government-sponsored enterprise (GSE) reform components of the speech. I will focus on the initiatives of the Obama administration to eliminate the barriers to refinancing, making the case that, while the Home Affordable Refinance Program (HARP)—the large refinancing program put into place by the Obama administration in 2009—has been an unambiguous success, none of these further initiatives is likely to be implemented.

The success of HARP

Before embarking on the new initiatives, the speech contained a few words rightfully touting the success of HARP, the refinancing program for borrowers whose loans were insured by Fannie Mae or Freddie Mac (the GSEs) and were for an amount greater than 80 percent of the value of the underlying property (a loan-to-value ratio [LTV] greater than 80). The frustration for the administration in 2009 was that many borrowers who had been paying their mortgages on time were nonetheless unable to refinance out of high-interest rate loans because they had insufficient equity in their homes due to home price declines. They recognized that they could help those borrowers who had GSE-guaranteed loans without actually costing the taxpayers any money, because in lowering the monthly payments of these borrowers, they would also be lowering the risk to the GSEs.

So the administration introduced HARP in April 2009, for loans originated prior to June 1, 2009. While the initial program was a moderate success, it was hampered by a number of frictions that kept it from reaching the volume they had anticipated. In January 2012, FHFA and the GSEs addressed many of these frictions (and have made a number of further refinements since), resulting in a huge increase in refinancing volume.

The chart below shows how the effectiveness of the program changed over time. The left side of the figure below shows that prior to 2012, HARP activity was approximately 33,000 loans per month; since January 2012, it has ramped up to 91,000 loans per month. Looking at the borrowers most likely to default—those with LTVs over 105, the picture is especially dramatic, as shown in the right side of the figure. From the inception of the program to December 2011, 91 percent of the borrowers had LTVs of 80-105 percent, and only 9 percent had LTVs over 105 percent. With the streamlining of the program in January 2012, and an expansion to include borrowers over 125 percent LTV, 56 percent of the borrowers were in the 80-105 percent category and the other 44 percent were over 105 percent LTV.

With interest rates now up 100 basis points (bps) (1 percent) since the lows, the share of 30-year fixed-rate loans with an incentive to be refinanced—namely those with interest rates more than 75 bps above current rates—has plummeted from 70 percent to 30 percent. Thus, lenders are apt to focus more on purchase borrowers and on refi borrowers who have rates high enough that there is an incentive to seek a lower rate. Consequently, we would expect that the absolute quantities of new HARP refinancings will decline with higher rates, but that a larger proportion of the refinancings going forward will be concentrated in HARP loans.

The president’s actions to eliminate the barriers to refinancing

In his speech, the president proposed the following three actions:

  • Streamline refinancings for borrowers with government-insured mortgages.
  • Waive closing costs for borrowers who refinance into a shorter-term loan to more rapidly rebuild equity in their homes.
  • Expand eligibility for refinancings to borrowers who do not have government-backed mortgages by creating special programs through the Federal Housing Administration (FHA) or through Fannie Mae or Freddie Mac.

Regrettably, it is unlikely that legislation will pass on any of these fronts. However, the Federal Housing Finance Administration (FHFA), which is the conservator of the GSEs, and the GSEs themselves have already gone a long way toward meeting the goals of the first initiative.

Streamlining government refinancings

The first action point, eliminating frictions in the refinancing of Fannie Mae/Freddie Mac loans, is one long advocated by the Obama administration. Senators Boxer (D-CA) and Robert Menendez (D-NJ) introduced a bill to accomplish this in 2012; this bill was re-introduced by the same sponsors in February 2013 (the Responsible Homeowner Refinancing Act of 2013, S. 249). The sponsors are in discussions as to how to move it forward, although passage does not seem likely given the number of items on the legislative table.

However, much of what is in the bill has already been partially accomplished through administrative action. In particular, when the bill was first introduced in 2012, borrowers were beholden to their original servicer who often took advantage of their competitive advantage to offer the borrower a non-competitive rate. The bill was intended to break down that barrier. Since then however, the GSEs and FHFA have reduced the documentation requirements on different servicer refis, and allowed the representations and warranties on HARP or streamlined refinancings from different servicers to sunset after 12 months, thus reducing the original servicer’s competitive advantage.

The GSEs have also greatly expanded the opportunity to use automatic valuations for HARP refinancings, eliminating the need for an appraisal on most loans. At this point, the process for refinancing high-LTV loans originated prior to the June 1, 2009 cut-off date is fairly streamlined.

It is important to realize that HARP is applicable only to borrowers with loans originated prior to June 1, 2009. Boxer-Menendez currently leaves this cut-off date intact, although there has been chatter that it could be extended for one more year—until June 1, 2010. This feature is highly controversial, as investors have been reassured repeatedly that the cut-off date will remain intact. On the basis of these assurances, investors in HARP loans have been willing to pay more, and in many cases substantially more, for the prepayment protection in securities backed by HARP loans. An extension of the cut-off date could result in investors viewing the GSEs and FHFA as less credible going forward, while the number of additional borrowers captured by a 1 year date extension would be relatively small.

There are, however, possible compromises that would extend HARP eligibility without harming HARP investors, such as extending the cut-off date for purchase (rather than refi) loans, or, more broadly for loans that have never been HARPed before. We view even this type of extension as a low-probability event.

Waiving closing costs for borrowers who refinance into a shorter mortgage

The second action proposed by the president is to waive closing costs for borrowers who refinance into a shorter mortgage, in order to encourage the origination of loans that build equity more quickly. The concept makes a lot of sense. By incentivizing borrowers to take loans that help them pay off their principal more quickly, policymakers would be able reduce the amount of negative equity weighing down the market without any expense to the taxpayer, as the cost of the incentive payment is offset by the savings due to the lower risk of these borrowers. This waiver was included in President Obama’s February 2012 Housing Plan, which formed the basis for his State of the Union address. It is also the cornerstone of a bill first introduced in 2012 and re-introduced in 2013 by Senator Jeff Merkley (D-OR), the Rebuilding Equity Act of 2013, S. 1375. While this bill is unlikely to move forward, there has been some administrative action on this front. When the HARP program was streamlined, FHFA removed all up-front risk-based fees when the borrower refinances into a shorter loan.

Refinancing borrowers who do not have a government mortgage

The third action, creating a refinancing vehicle for high-LTV borrowers who lie outside of GSE space (high-LTV borrowers in which the loan is in a private-label security or in a bank portfolio), has been a long-time goal of the Obama administration. It stems from the frustration that borrowers with a good payment history cannot take advantage of lower rates due to a lack of equity in their existing mortgage. However, legislative action is needed to put in place a program correcting this problem.

President Obama proposed this measure in his February 2012 and 2013 State of the Union addresses. When it was proposed in 2012, the program was very specific, and was going to be done through FHA. Since then, the FHA Mortgage Mutual Insurance Fund has run into well-publicized issues, and it may be politically easier to do it through Fannie Mae or Freddie Mac. The Phoenix speech left the channel open. In July 2013, Senator Merkley introduced a bill (Rebuilding American Homeownership Act, S. 1373) that would allow for the refinancing of mortgages outside of government purview by expanding HARP to loans that lack a government guarantee. The GSEs would be directed to price for the risk they would be assuming.

Like HARP, the Merkley proposal requires existing credit enhancement to remain in place; if there is no credit enhancement on mortgages with a greater than 80 percent LTV, the GSEs would absorb the risk. FHFA Acting Director Ed DeMarco is said to be sympathetic to refinancing of non-agency mortgages, as long as the pricing is such that the agencies are not required to subsidize these mortgages. Stated differently, because the loans are not currently backed by the GSEs, they do not currently own this risk. DeMarco’s position is that, consistent with the definition of conservatorship (“to conserve assets”), the GSEs must charge a high enough insurance premium to cover their risks. Thus, the price they would charge for higher-LTV loans under the president’s or Senator Merkley’s proposal would be a fair amount above the rates the GSEs charge on the low-risk (low LTV, high credit score) loans they are currently backing. And if they do that, the number of borrowers that would benefit would be small. There are no specifics attached to the president’s most recent proposal; the lack of a vehicle and the lack of specificity all but guarantee that we are unlikely to see action on this over the balance of 2013.

Further action on refinancing unlikely

HARP has been a huge success, and that success is apt to continue. However, further actions to eliminate barriers to refinancing are unlikely to be implemented—and if implemented, would be unlikely to affect very many loans. 

Research Areas Housing finance Housing
Tags Federal housing programs and policies Housing and the economy Agency securitization Credit availability Housing finance reform Homeownership Housing affordability
Policy Centers Housing Finance Policy Center