On Monday, October 24th, to much fanfare, the Federal Housing Finance Agency announced that they were revising the Homeowners Affordable Refinance Program (a/k/a HARP). In addition to lowering some of the costs of refinancing (which will certainly be appreciated and is helpful but is not an impediment to refinancing in most cases), the major revision was the lifting of the equity cap of 125% for “underwater” homeowners. Previously, HARP provided that a homeowner could refinance if they had up to 25% of negative equity (i.e. a 125% loan to value).
Under HARP, which has been in effect for about 2 years, about 900,000 people have refinanced using the program. This is about 10% of the 9,000,000 people who have refinanced in the United States during that same time period. The federal government estimates that another 1,000,000 people will refinance under the new program commonly known as HARP 2.0. I believe that at best this number will be less than half of their estimate (i.e. 500,000) and likely much less than that. In addition, even if it is as many as 500,000, most of these people would have been eligible to refinance under HARP in any event but did not know about it or were not motivated to do so for any number of reasons. Real estate prices nationwide have declined between 15 and 35% in most areas over the past 3 years. So, unless someone bought during the last year of the bubble and put down less than 5% (both combined representing a very small percentage of homeowners), they would have been able to refinance under HARP with the 125% loan to value allowance. The reason they could not, other than in a very small percentage of cases, has nothing to do with the 125% loan to value. It is the result of other factors that are detailed below and why this is destined for failure.
So why is this a boondoggle? (Note. boondoggle is defined by dictionary.com as “a project funded by the federal government out of political favoritism that is of no real value to the community or the nation”). The short answer is because it does not address any of the 2 major shortcomings that made HARP of limited value to most homeowners who are underwater. These are (i) subordinate loans (e.g. HELOCs) and (ii) homeowners who can no longer qualify for a loan due to changes in their credit scores, employment and/or income. HARP 2.0 also does not address loans that are not being held by Fannie Mae or Freddie Mac. But, as this was never its intent, I will not comment on that in this post.
In addition to the 2 fundamental problems above, HARP 2.0 in touting the removal of limits on states hardest hit by the housing bust like Florida and Nevada fails to address a 3rd problem that is mostly unique to those 2 areas. These are the condominium requirements of Fannie Mae and Freddie Mac that still cannot be met. Even if a homeowner can refinance under HARP 2.0 without regard to property values, without the removal of these requirements HARP 2.0 will be the epitome of a “paper tiger.” Some of these condo requirements are that 50% of the units in the complex must be sold or in contract; that 70% of the units are currently owner occupied; that adequate reserves being maintained and that no litigation involving the condominium association exists.
Once again, under the theory that “doing something is better than doing nothing,” the federal government is attempting to fix a problem that does not exist rather than the one that does. Unless they find some way to provide incentives to (mostly) HELOC lenders so that these lenders will agree to subordinate their existing HELOC to a new HARP 2.0 loan, the program will be of little value to most homeowners. These HELOCs were taken out by many homeowners at the time of purchase to either avoid PMI or reach combined LTVs of 95% or even 100% . They were also taken out after the purchase for renovations, other investments and recreation (e.g. vacations).
In addition, for homeowners who are current in their mortgage obligations, their existing loans should be modified without regard to their current credit, income or employment status. Because as almost everyone who cannot refinance for any of the above reasons has said, quite logically, “if I am making my current mortgage payment I will certainly be able to make my new mortgage payment if the amount is lowered by several hundred dollars.” They then go on to say “since the bank already has my loan, why won’t they let me refinance where there is no additional risk and actually less of a risk if my payment is lowered?” Good points, good questions and very logical. However, until the federal government starts listening to those of us in the industry who have day-to-day interaction with homeowners and to the homeowners themselves as opposed to the economists and other “so called” experts, the only laws we will have are “the laws of unintended consequences.”