Can Refinancing at Lower Rates Cure the Housing Crisis?

With no light at the end of the tunnel in the foreseeable future for the housing crisis, the Obama Administration hopes its latest iteration of the Home Affordable Refinancing Program (HARP) will provide not only relief, but hope. Aimed squarely at the borrower segment that owes more than their home is worth, the goal is to make payments more affordable by allowing mortgages in a negative equity status to be refinanced. But does this solution substantively influence a cure to the crisis, or simply suppress one of its symptoms? 

When HARP debuted in 2009, it allowed borrowers with loan-to-value (LTV) ratios between 80% and 125% to refinance at prevailing interest rates (much lower than when the loans were originated) and have lower monthly payments in a tough economy. A number of obstacles stalled widespread success of HARP in its initial form, including:

• Borrowers with LTVs higher than 125% did not qualify for the program. As housing values plummeted in many parts of the nation, the class of “underwater borrowers” with negative equity exceeding the 125% cap skyrocketed, especially in states hardest hit by steep declines in housing prices.
• Only mortgages guaranteed by Fannie Mae and Freddie Mac qualified for refinancing under HARP, which excluded mortgages that didn’t conform to Fannie and Freddie’s criteria. In short, primarily 30-year fixed mortgages qualified for the program; jumbo loans, adjustable rate mortgage loans, and loans underwritten using subprime underwriting standards did not.
• Lenders and servicers were liable to buy back guaranteed loans that defaulted.

In two years, less than 900,000 households refinanced under the program of which less than 72,000 mortgages had LTVs over 100%.

In an attempt to widen the appeal of the program, “HARP 2.0” as it is now known in some circles, lifts the 125%  LTV cap, removes appraisal requirements, significantly relaxes income documentation and underwriting requirements, and reduces or waives fees for borrowers who refinance into a lower term. As a result, borrowers at the extreme ends of the negative equity spectrum could get some much needed relief in the terms of lower monthly payments.

While a significant number of borrowers are breathing a sigh of relief, the root of the real estate crisis continues unabated. HARP 2.0 doesn’t address the over 6 million borrowers who are either seriously behind in payments or in some stage of foreclosure. Neither is it preventing lenders from pursuing an aggressive schedule of foreclosure filings after a long hiatus. HARP 2.0 is doing little to brake the descent of home values and associated negative equity status as an ever-growing inventory of foreclosed homes and REOs continue to plague the market; nor does it have any impact on the millions of loans not sold to Fannie and Freddie that are in a negative equity status.

While a lower monthly payment for a greater number of borrowers is a well-intentioned benefit of HARP 2.0, it provides too little light to guide the housing industry out of the darkness. Returning equity to home values, reducing the glut of distressed properties on the market, providing solutions that directly address the issues of the distressed borrower will provide the shot in the arm that’s needed to succeed. 

Gil Priel is Managing Director and Principal of the Peak entities. Priel has worked in all phases of the real estate industry including land development, management, financing (portfolio lending for commercial and residential properties plus non-performing debt acquisition and broken development cycles) and disposition of all product types.