Saying that there are no silver bullets that will solve all the problems facing the housing and mortgage markets CoreLogic, a provider of information, analytics and business services has picked winners and losers of what is being called "HARP2.0". The Home Affordable Refinance Program (HARP) began in 2009 to assist borrowers who are current in their mortgages but underwater relative to the value of their home. On October 24 the administration announced significant changes to the program to make it available to borrowers beyond the estimated 900,000 who had participated.
The changes eliminate the prevailing 125 percent maximum loan-to-value (LTV) ratio for new HARP mortgages, reduce risk-based fees for borrowers and grant representation and warranty relief to make the program more palatable to lenders. There are also changes to facilitate appraisals and subordination of junior liens and the program is extended until the end of 2013. However, the program is only available to borrowers with mortgages sold to Freddie Mac or Fannie Mae (the GSEs) prior to the end of May 2009.
The CoreLogic report says that time will reveal the true impacts of the changes but it is certain that many more borrowers will benefit than would have otherwise, as will the housing markets and local economies that are hardest hit by the housing crisis.
CoreLogic and its chief economist Mark Fleming estimate that there are more than 20 million borrowers with insufficient or negative equity in their homes which is preventing them from taking advantage of current low rates and thus causing a deterrent to consumption and improvement of household balance sheets. An estimated 4.7 million of these homeowners are underwater by 25 percent or more and are disproportionately located in Nevada and Florida which together account for 21 percent of all underwater mortgages nationally. While 93 percent of the GSE portfolio is performing, the Nevada and Florida mortgages in that portfolio are performing at 85 and 87 percent respectively.
The company said that while HARP 2.0's primary benefit, increased refinancing of insufficient and negative equity borrowers, doesn't addresses the two biggest problems facing the housing market; distressed borrowers and shadow inventory, there are still key benefits that should be expected for the various constituencies:
The GSE's: The ability for borrowers to refinance at a lower rate should reduce the default risk for the GSE's by reducing the mortgage payment and increasing available household funds.
Mortgage Origination Market: CoreLogic agrees with the general consensus that the changes should lead to an increase of somewhere around 2 million new mortgages in 2012 and 2013. Assuming an average loan of $175,000 this would be $350 billion over two years, however, the number could be negatively affected by a rise in rates
The Broad Economy: If the estimates of refinancing hold, HARP2.0 could provide an economic stimulus of several billion dollars feeding into some of the nations hardest hit areas. While some of this money will be saved and some used to pay down debt, it could have the same impact as a few billion dollar tax cut.
The benefits are less clear or are mixed for two other constituencies.
GSE Bondholders: The changes are likely to enhance the attractiveness of refinancing so that investors will receive their capital back sooner with few options for investing it at similar rates. In the future the opposite should occur and prepayment speeds will be reduced because so many loans will be locked into historically low rates
Housing Market: Because the program does not reduce principal it will not significantly reduce the level of insufficient and negative equity and will be unlikely to effectively reduce strategic defaults; nor will it reduce shadow inventory as homeowners must be current on loans to participate. Any likely benefit will be in the form of lower future shadow inventory due to reduced future delinquency risk.
