HARP still Hamstrung says NAR | Bedford NY Real Estate

The administration introduced HARP 2.0 in the fall, which among other things eliminated the loan-to-value limits on certain loans refinanced by Fannie Mae and Freddie Mac.  Those changes were put in place in March and appear to have made an impact, though that impact is muted.  A robust HARP could reduce the cost of homeownership for roughly 3 to 4 million borrowers, thereby prevent some foreclosures in areas experiencing a fledgling together a recovery, boost confidence in the housing market and help to modestly stimulate the economy.

Below is a chart that shows the share of outstanding loan balances that prepay (CPR) on Fannie Mae mortgage pools issued in 2008 at various coupon rates.  Each coupon represents a group of borrowers and roughly corresponds to rate on their mortgages (minus servicing costs and fees).  The average mortgage rate on the 30-year fixed rate mortgage is graphed in red.

In the chart below, it is apparent that the prepayment rate on most coupons began to rise in mid-2011 as mortgage rates fell.  However, the higher coupons were slower to respond and the 7.0% coupon was nearly flat until March of 2012 despite rates that had slid from roughly 4.6% to nearly 3.9%.  This pattern is counterintuitive and breaks from historic norm as higher coupons have more to gain by refinancing.  For example, the monthly savings for a person refinancing from 7% to 4% is proportionally greater than a borrower who refinances from 5% to 4%.

Market analysts as well as staff at the regulators and the agencies noted this pattern and have been working to identify factors that keep high rate borrowers from refinancing.  Some of the “frictions” that have been identified include:

  • 2nd lien holders not re-subordinating their loans; that is, the holders of 2nd loans being either unwilling or unable to agree to allow the 1st lien to keep its favored status after the refinance, something that is normally lost if the 1st lien is modified.
  • Mortgage insurance companies who won’t port MI contracts to the refinanced loan
  • Requiring new representation and warrants for any new servicer, but not the original servicer.
  • Loan level pricing adjustments, which can add 0.75% to the upfront cost of a loan for HARP loans up to $1,500, and
  • Appraisal fees

There is mixed opinion about which of these factors is most constraining for HAMP eligible borrowers.  The majority of mortgage insurers now allow the transfer of policies on HARP refinances, while the largest banks, who hold nearly 70% of 2nd liens, allow for re-subordination.  That leaves a large portion of the universe of 2nd liens, though, and there are reports of companies that buy up the 2nd lien debt for well below value and act as a debt collector.  Loan level pricing adjustments can be financed, but would add roughly 19 basis points to the annual rate and a $400 to $500 appraisal could be enough to hinder a cash-strapped borrower.  However, for a borrower refinancing from 7% to 4%, the additional 19 basis points may not explain the reluctance to refinance unless financing to the fee is not an option.  Most analysts agree that the servicing issue may carry weight, though.  The constraint on new servicers reduces competition and allows same-servicers to charge higher rates, which some analysts have quantified as greater than half a percentage point for some borrowers.

With the implementation of HARP 2.0 in March, one can see from the chart above that prepayments on the highest coupon (7.0) jumped from 23.3% to 30.7% between April and May of this year, suggesting that the elimination of LTV limits had an impact.  The spread between all coupons and the 5.0 coupon eased over this period.  However, the counter intuitive ranking of prepayment speeds relative to coupons is persistent, though smaller, which suggests that frictions remain that limit refinancing of HARP eligible loans with higher coupons.  Furthermore, between May and June, the rate of prepayment growth eased, plateaued, or declined for all coupons, suggesting that the benefit of HARP 2.0 may have peaked or is close to it.

The benefits of a robust HARP program are many-fold for the housing market, particularly those local markets that experienced the sharpest price decline and where many homeowners remain underwater.  While HARP 2.0 appears to have had an effect, there are several measures that may provide further help by restoring competition and confidence to the market place.

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