Why HARP is Struggling

An article in today’s Wall Street Journal lays out some of the problems with the Home Affordable Refinance Program. “Borrowers Miss Out on Refinance,” reads a headline.  According to WSJ, HARP is not reaching scale because it doesn’t address the needs of people who are under water in their mortgage.

HARP is struggling for several reasons. For one, the program still isn’t designed to meet the needs of borrowers. Second, banks don’t appear to feel compelled to act with integrity in their efforts to make HARP loans. Last, Fannie and Freddie are imposing new charges on loans that make it harder for cash-strapped consumers to make refinances.

This is a shame, of course.  Refinance rates are very low.  Even for borrowers with the best prime mortgages, refinance rates are at historical lows.  The refinance market should be booming.  While last year was a busy year for refinances, it was not nearly as high as it should have been in the context of these low interest rates.

In 2003, when refi rates were roughly the same as those available to prime borrowers now, refinances were $2.9 trillion, according to Inside Mortgage Finance.  In 2009, though, only $1.2 trillion in mortgage balances were refi’ed.

That number should be high, and HARP should make it even higher.  HARP is supposed to provide refinances to borrowers that have made their mortgage payments.  It is the companion piece to the Home Affordable Modification Program (HAMP).  HAMP is for borrowers that need a loan modification to stay in their home.  Treasury reports on both programs. Treasury’s data comes from reporting by banks and servicers.

The problems with the program are many.  First off is that fact that many borrowers can’t meet the loan-to-value requirements to participate. Many borrowers are under water – they owe more on their loans than the underlying collateral value of the homes themselves.  CoreLogic says that as many as one if four borrowers is under water.  n September, HARP’s guidelines were changed to allow refinances at up to 125 percent loan-to-value.  This isn’t a new idea.  Back in July 2009, Treasury said that it was considering the idea.  Still, for borrowers in places like California, Florida, Nevada, or Arizona, this is possibly not enough. More than half of all loans in Nevada are under water.

It hasn’t worked.  Only 188,000 borrowers have used HARP, according to Barclay’s. In December 2009, only 2,000 refinances took place.

The Banks are not helping

Second, the banks aren’t interested in playing along with Treasury. I know a friend that is getting a HARP refinance right now. Interestingly enough, his bank (Wells Fargo) said that they have their own internal standards for HARP. They will only do a HARP loan when the loan-to-value is no greater than 70 percent.

His account of the conversation was interesting.  First, he didn’t contact Wells.  Wells called him, out of the blue, and made him an offer that he couldn’t refuse. Here’s how it went:

Wells Fargo: “We need to do some refinances, in order to make good with the regulators.  My orders came down on Friday.  Make these loans.  Wells doesn’t want to get in the papers that they aren’t making these loans.  So, you meet our criteria.  How would you like to save $160 per month?”

Wells is using HARP to lower payments on a select group of customers. In the same conversation, the Wells staffer used the time to pitch my friend on some new credit accounts. The Wells guy offered to roll some of his credit card debt into a new home equity loan.  Does that seem like a sales call?

That policy would seem destined to make sure that the only loans made through HARP are for properties that are in no danger of going bad.  Not many homeowners are going to have more than 30 percent equity in their homes, at today’s lower appraisals. Few are likely candidates for foreclosure.

How Fannie and Freddie Make it Worse

The article hints at a second problem.  The four borrowers profiled in the WSJ story all had to pay additional one-time charges on their new loans.  Two paid an “adverse markets deliver charge.” Another paid a low-credit score charge.  A third had to pay a high loan-to-value fee. These charges are not part of HARP, but instead part of new fees imposed by the agencies on some loans. The fees add on to closing costs.

The adverse markets charge is a 1 percent fee levied onto any mortgage balance on a home located in a community where home values have dropped too much.

This policy set out by Fannie and Freddie will undermine not only HARP, but also the value of home prices going forward. It will have dramatic impacts in struggling markets. It will keep home prices down and it will keep many borrowers out of the refinance and home purchase markets. It seems like huge news, but it remains under the radar.  Why? How can this not be a pressing policy issue?