Secretary of Housing and Urban Development Shawn Donovan testified before a hearing of the Senate Committee on Banking, Housing, and Urban Affairs on the current implementation and efficacy of HARP 2.0 and on several bills that have been introduced to expand it or remedy some of its flaws. This is a summary of the transcript of that hearing and will be covered in two parts.
Committee Chairman Tim Johnson (D-SD) opened the hearing by saying that, despite changes made to the HARP program last year, he continues to hear from his constituents and the housing industry that more could be done to encourage competition in the refinancing market and give homeowners more options.
Robert Menendez (D-NJ) said there was a need to attack the problems in the housing market from different angles including refinancing, particularly for borrowers who are making payments but who have interest rates on their mortgages well above the 4 to 5 percent available now. Menendez said he would be introducing a bill called the Responsible Homeowner Refinancing Act of 2012 which would help 17.5 million borrowers with loans through the GSEs but who are trapped in high interest loans because of barriers to refinancing. His bill, however, does not include any proposal to refinance private loans through FHA or to pay closing costs of borrowers who agree to shorter loan terms.
Donovan said that the housing market appears to be turning a corner and, with interest rates at historic lows, more than 14 million homeowners have refinanced and put nearly $27 billion a year back into the economy. There is still, however, a range of barriers keeping struggling borrowers from getting the relief they need.
HARP 2.0 followed the president's call to identify barriers that were keeping people from refinancing. Four of the largest servicers report they are now processing applications from 750,000 homeowners who stand to save an average of $2,500 per year on their mortgage payments.
Financings nationwide were up over 100 percent in March compared to a year earlier and in the hardest hit states they have more than tripled. Donovan said they expect these numbers to continue to rise when fees for FHA refinancing are cut next month.
In addition there are four legislative proposals supported by the administration which could ensure that every responsible borrower has the opportunity to refinance and rebuild equity. The first would guarantee non-government backed borrowers' access to refinancing as long as they are current on their mortgage, meet a minimum credit score, have a loan within conforming limits and are currently employed. This program includes features to minimize program costs and lenders who wanted to refinance deeply underwater loans would have to write down principal balances to reduce stress on the borrower as well as taxpayer risk. While this program would be run through the FHA it would be financed outside of FHA mortgage insurance fund.
The second proposal, sponsored by Senator Menendez, would allow HUD to clear the remaining carriers to refinancing GSE-insured loans. This bill would extend streamlined refinancing for all GSE borrowers irrespective of their loan to value ratio and creates competition between lenders and removes potential hurdles like unnecessary appraisals.
The remaining two legislative proposals are designed to build equity. The first proposes that the average closing costs, about $3,000, be paid by the GSEs if the borrowers agree to refinance into a loan with a term of 20 years or less. This would provide a path for borrowers to get their heads above water faster. The second is the Project Rebuild Act which would further stabilize places where prices have dropped the most and would create 200,000 jobs.
Donovan said that a foreclosure sign on a block reduces neighboring home prices by as much at $10,000 and in the hardest hit places people often live near a dozen or more homes with those signs. But the neighborhood Stabilization Program has proven we can halt the slide in home values in these places and new data that shows that three quarters of the neighborhoods that received targeted first and second round NSP funds showed increased home prices largely because of improved vacancy rates.
Donovan said there are many families who have loan to value ratios on their first liens of 80 percent or less but because they have second liens or other debt they are being stopped from refinancing so extending HARP 2.0 to above water borrowers is a critical next step.
Another barrier is that competition is being dampened because servicers are being discouraged from competition to finance loan they don't service. There are changes that can be made that would help to create more competition and lower the costs of refinancing. A third problem is that there are certain areas where automated appraisals are hard to do and that increases costs because of the need for manual appraisals. HUD wants to extend those automated appraisals to the remaining 20 percent this affects.
Donovan said he thought that steps that could be taken by federal agencies and regulations has been done most had been taken but, he said, "We do think there are some critical pieces where the legislative authority is required because of legal uncertainty. And so the legislation remains critical to pass as quickly as possible."
Johnson said he keeps hearing that the put back risk is hampering competition and creating barriers for community banks and asked if this was creating a problem for consumers and how it could be addressed. Donovan said it is a problem when the lender made mistakes and a new servicer is worried about being responsible under reps and warranties, even though they weren't responsible for the original loan. Many of these barriers were removed under HARP 2.0 but there remain differences in the way Freddie Mac and Fannie Mae are handling this and also differences between how underwater and above water loans are treated.
Johnson noted that the administration's housing plan would expand FHA refinancing to non-GSE borrowers who are current on their mortgages and asked Donovan how he would protect the taxpayers from the potential risk posed by these loans.
Donovan said that as these homeowners must be current they are already relatively low risk loans. Lowering the payments lowers risk even further and there are strong standards for credit score, employment and so forth. Two other factors are critical; to create a separate fund, different from the FHA MMI fund with a dedicated revenue source t0 offset any expected costs and then a requirement that the deeply underwater loans would have to be written down to a LTV of 140 percent or lower in order to be refinanced.
Richard Shelby (R-AL) expressed his concern about the solvency of FHA which the latest actuarial report says has a capital ratio of only 0.24 percent which he called "pretty low" and asked Donovan how he planned to increase the number, when it would be above the statutorily required 2 percent and whether even that was adequate to prevent taxpayers from bailing our FHA in the future. "If a private mortgage insurer held only 2 percent capital," he asked, "do you believe it would be adequately capitalized?
Donovan said that the latest projections were for a return to 2 percent by 2015, but since then FHA had seen $1 billion in recoveries from the servicing settlement and CBO had revised the administrations estimates for FHA and Ginnie Mae receipts upward by $1.8 billion for next year. While the comparison with a private mortgage insurer was not valid, he said, "I'm not going to say today that 2 percent is absolutely adequate."
Shelby asked if Donovan disputed the findings of a paper from MIT that models the effects of expanding a large-scale mortgage refinancing program and discusses the negative economic impact that could result from losses taken by investors in mortgage-backed securities. Donovan said "We clearly have modeled into the net benefits. And I think the Fed and other economists that have looked at this do calculate in the lost interest payments to investors as part of this." Even though there are investor losses, there are significant net benefits to the economy from those savings, he said.
Menendez that that the $2,500 average saved by HARP borrowers each year could be increased through the additional savings borrowers could get if the Menendez-Boxer bill were enacted. The bill would increase competition by making it easier for lenders to complete for loans they aren't already servicing. Donovan agreed that they would both increase the savings to families already planning to refinance and expand the pool of families who might refinance. When the appraisals and other fees are taken into account there might be as much as $1,000 more a year in potential savings he agreed.
Donovan said that all of HUD's modeling suggests there would also be significant savings to the GSEs in terms of lower default rates. A Columbia professor said that he expected the savings to exceed $20 billion although HUD's expectations are somewhat lower.
Donovan told Menendez that many of the barriers to competition among banks were removed by HARP 2.0 and others would be addressed by the Senator's proposed legislation. What is happening now he said that servicers already have the data through the GSE systems to refinance loans they are servicing. They only have to do a verbal confirmation of employment. Servicers who might want to compete to refinance that loan still have to go through a fuller underwriting in those systems, getting a full W-2 and other documentation of employment and income. Given that the risk already exists on GSE's books, we ought to go the extra step and make sure there is competition. One research estimated that the potential was to save as much as $15,000 per borrower by increase the competition to refinance these loans.
Senator Bob Corker (R-TN) said he was hearing from many people that the servicer settlement agreement was unfair in that the big banks are able to get 45 cents in credit for every dollar of private investor money they cram down under settlement terms. Donovan said they have been clear that write-downs that happen on private label securities loans need to be net present value positive and have been in discussions to make sure the servicers agree to use the HAMP model for this. He said he thinks things are better than before but does continue to hear concerns about the model the servicers are using and are working with them on it.
Second liens, he said, are a bigger obstacle. Significant write-downs have been required and in some cases extinguishment, but there are discussions with investors about further steps that might be taken.
Corker asked why the second lien shouldn't be automatically extinguished. "Why would we give any credit at all to a second lien when you're writing down any portion, even a penny, of the first lien?" Donovan said the problem is there is no law that says that and the government cannot just impose it without legislation or something else.
Corker said he would like to see the Menendez legislation, by the time it gets to the floor 'we absolutely, totally extinguish 100 percent any second mortgage before we allow one penny of first mortgage to go away."
Corker pointed out that the consumer agency is looking at something called rebuttable presumption in formulating the qualified mortgage rule. This, he said, allows them years down the road to come back on originators. Corker said it seemed to him that was a huge problem when it comes to getting credit for viable borrowers.
Donovan said, while he wasn't an expert on the subject, "I think if we could get to a standard where there is a very clear bright line under rebuttable presumption, that I think would satisfy most of the concerns that I hear about whether there would continue to be liquidity available. It's not the same as a safe harbor, but I think it's as important, if not more important an issue to be looking at as just the difference between a safe harbor versus rebuttable presumption.
This remainder of this hearing will be covered in a second article.