There has been a lot of chatter over the past few weeks about forthcoming changes to the Home Affordable Refinance Program (HARP), administered by the Federal Housing Finance Agency (FHFA). Launched in 2009, the program’s goal was to facilitate refinancing of mortgages guaranteed by Fannie Mae and Freddie for borrowers that were current on their payments but had insufficient equity in their homes to meet the necessary underwriting requirements for refinancing. Specifically, the program gives borrowers the ability to refinance mortgages with loan to values (LTV) of up to 125% on mortgages originated prior to June 2009.
Through the 2nd quarter of 2011, only 838,000 mortgagors have taken advantage of HARP. The relatively disappointing results reflect mortgage banker concerns of incurring additional liability by originating a new mortgage. Originators are required to make representations and warranties to Fannie and Freddie such that, in the event a loan is subsequently deemed underwritten outside agency criteria, the originator could be forced to repurchase that loan at par.
The FHFA regulates Fannie and Freddie as well as the twelve Federal Home Loan Banks and and is working on relaxing the rep and warranty language so as to facilitate more activity. As home prices have continued to decline, the Agency is also considering raising the LTV above the current 125% limit. The issues are complex because on the one hand, reducing borrower rates is a net positive for Fannie/Freddie’s credit exposure (lower rate means less likelihood of default) but on the other hand, any refinanced mortgage means less income for the agencies’ investment portfolios as well as other holders of Agency mortgage backed securities.
At the September 21 FOMC meeting, the Fed announced the implementation of what has come to be known as “Operation Twist”. Through June 2012, the Fed plans to sell $400 billion of short-dated treasuries and reinvest in longer dated securities with the goal of pushing down long term interest rates. To a large extent, the market has anticipated this policy action and mortgage rates have come down significantly, with 30 year mortgage rates approaching 4% (see chart below).
Source: Freddie Mac
Many borrowers that have been unable to refinance have mortgage rates exceeding 6%. Assuming they could access today’s current rates, many could lower their interest payments by 2% or more. On a $300,000 mortgage balance, that could translate to an annual savings of more than $4,000. That $4,000 per household could represent a powerful stimulus to an economy facing many headwinds.
There is some talk that President Obama may himself be making the HARP change announcement. If so, that would underscore the very real importance the Administration places on this policy initiative to jumpstart the economy.
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