Recent revisions made to the Home Affordable Refinancing Program (HARP) appear to have sparked an increase in loan applications, raising hopes that more underwater mortgages could refinance.

More than 20% of refinance applications are for HARP loans, up from 10% a month ago, according to the Mortgage Bankers Association, which tracks applications on a weekly basis.

The Federal Housing Finance Agency (FHFA) unveiled changes to a streamlined HARP program in late October, opening the door on refinancing Fannie Mae- and Freddie Mac-backed mortgages with loan-to-value ratios north of 125%.

Implementation of the revised program — known as HARP 2.0 — began Dec. 1. Refinancings of underwater borrowers with an LTV above 125% began in February. Homeowners must be current on their payments to qualify for a HARP refinancing.

FHFA acting director Edward DeMarco told a Senate panel last week it will be a “few months” before Fannie, Freddie and most of the industry complete the implementation of the HARP 2.0 changes. “Already many of the largest lenders are seeing tremendous borrower interest and we expect to see an increase in HARP volume in coming reports,” DeMarco testified.

Department of Housing and Urban Development (HUD) secretary Shaun Donovan told the same panel that HARP 2.0 should be “fully up and running” by the end of March.

The HUD secretary testified that 50,000 HARP 2.0 refinancings have actually closed. And an informal survey found that almost 300,000 applications have been filed for HARP 2.0 refinancings. “We are encouraged by those numbers so far,” Donovan said.

The housing secretary also noted that Obama administration officials are still working with the FHFA to remove “operational barriers that preclude or hinder cross-servicer refinances.”

The GSE issue involves the liability a lender/servicer takes on in refinancing a loan controlled or owned by another servicer.

The government would love nothing more than to have servicers compete against each other for HARP 2.0 loans instead of mortgagors relying on their existing servicer. But many servicers claim to have capacity problems, which slows the processing of applications. Without competition, servicers do not have an incentive to expedite the process.

If Fannie and Freddie assume all the default risk, “everyone will participate in the HARP 2.0 program,” predicted Barry Habib, chief market strategist at Residential Finance Corp., Columbus, Ohio.

“If it is pushed to the new lender, you are going to have very little uptake on this,” he added.
HUD and FHFA officials are trying to find a balance to ensure the government isn't taking on too much risk while ensuring more competition between lender/servicers. “That's where this is bogged down right now,” Habib told ASR sister publication National Mortgage News. “The big question is where the contingent liability is going to fall. That hasn't been answered yet.”

The mortgage industry veteran, who worked as a trainer at GMAC Mortgage and CTX Mortgage, contends the HARP program is flawed because it doesn't give borrowers a financial incentive to stay in the home.
After a refinancing a $220,000 mortgage at 6.5% to a 4% rate, the borrower still has a $220,000 mortgage and no equity, he said. The monthly payment is significantly lower, but still higher than the cost of renting or buying a similar home down the block.

HARP borrowers are strategic default candidates, he believes. “They will wake after six or eight years and realize they are not building equity,” Habib said.

Habib is pushing a plan that splits the existing mortgage into two parts, a first mortgage with an 80% LTV and a second mortgage for the remaining balance.

The borrower gets a 20-year fixed mortgage to quickly build equity and makes no payments on the second mortgage. The second mortgage is securitized and held by the Federal Reserve Board. It accrues interest until the borrower sells the property or voluntarily pays it off.

Habib estimates his plan would add $100 billion to $150 billion in MBS to the Federal Reserve's balance sheet. The federal government would be on the hook for any losses, which would be minimal considering the benefits, according to Habib.

“Even in a draconian situation,” actual losses would only be $10 billion to $15 billion,” he said. It would cost less than the “cash for clunkers” program or the homebuyer tax credit.

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