Another Day, Another Housing Program

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The Obama Administration is taking another crack at addressing a core problem hindering the economic recovery: underwater homeowners (that is, borrowers who owe more on their mortgages than their homes are worth) and the ripple-effects of that financial hardship.

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The Federal Housing Finance Agency announced plans Monday to revamp the three-year-old Home Affordable Refinance Program [HARP] to allow more underwater borrowers to refinance.

Ideally, qualified homeowners who have been consistently paying their mortgages would be able to refinance their loans at lower rates thereby staving off the threat of default and freeing up spending money for other purposes.

Both outcomes would ostensibly help the economy, if the program works exactly as designed. But given HARP’s lackluster results in its first three years of existence, the new initiative has its share of skeptics.

Anthony Sanders, a finance professor at George Mason University, said a “fundamental disconnect” exists between HARP’s goal of lowering monthly mortgage payments and the larger economic issues facing many Americans.

“There’s no evidence that lowering a mortgage payment a few hundred dollars a month prevents defaults,” he said. “Giving $200 a month to people who already have a job doesn’t really make any sense.”

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Homeowners aren’t defaulting on their mortgages over a few hundred dollars, he said. They’re defaulting because they’ve lost their job and can’t find another one, or have suffered some other financial catastrophe.

To open HARP up to more financially strapped homeowners, the FHFA has removed an earlier cap that disqualified borrowers whose mortgages were valued at 125% or more than the value of their homes.

The program is open only to those borrowers whose loans are backed by Fannie Mae and Freddie Mac, the troubled quasi-government entities that provide financing for an estimated 80% of all U.S. mortgages. (The government seized control of Fannie Mae and Freddie Mac in 2008 as they teetered on the verge of collapse.)

“This is an appropriate balancing of risk that’s being borne by Fannie and Freddie, and hence the American taxpayer," FHFA’s acting director, Edward DeMarco, said Monday during a conference call with reporters. “This will make HARP more available.”

The Obama Administration claimed the original HARP program would help 5 million borrowers. But the actual number has been less than 900,000.

The FHFA predicted Monday that by easing the restrictions on the old program and reducing some refinancing fees and streamlining the process as many as one million underwater homeowners could get help by 2013.

Critics say it still barely makes a dent. In August, Corelogic, a housing research firm, said 11 million mortgages, or nearly 25% of all residential home loans, are underwater.

The FHFA also hopes the revamped HARP gives banks with substantial mortgage portfolios additional incentives to participate. To that end, FHFA altered the program so that lenders won’t be forced to buy back HARP loans if underwriting problems are later discovered.

Under the previous, tougher restrictions, banks had little incentive to refinance mortgages, said Leif Thomsen, CEO of Mortgage Master, a large Massachusetts home lender.

Default rates haven’t reached critical mass for the big commercial banks, Thomsen explained, consequently they saw no reason to renegotiate a loan made at 6% interest down to 4%. Banks are, after all, in the business of making money by lending money, he noted.

Besides, given the federal guidelines that capped underwater loans at 125% of the value of the property, many struggling homeowners couldn’t refinance anyway. 

But lifting the cap should create strong competition for refinancing underwater loans, Thomsen predicted, a factor that could spark the big banks to renegotiate and refinance on their own or see all that refinancing business move to independent firms like Thomsen’s.

“It’s about time that this program came out,” Thomsen said. “I’ve been calling for something like this for three years.”

JPMorganChase (JPM) is already on board, issuing a statement Monday in praise of the new HARP and saying it could save consumers as much as $2,500 a year.

But Sanders said the program – and its creators – are still missing the point.

“I think they’re making the assumption that everyone who saves money on a refinanced mortgage will spend it on consumer durables. But they might put it away in their savings account or put it aside for their kid’s college education, like they should have in the first place,” he said.

Sanders said the government is essentially wasting its time on housing programs that he described as chronically “too small in scope” and off the mark in terms of targeting what’s really ailing the  U.S. economy.

“The government needs to step out of the way and let the housing market heal itself,” he said. “Lack of jobs is what causing the problem right now.”