New Data Shows HARP Mortgage Refinance Program Is Finally Working
After an overhaul in March, HARP, the government’s refinancing program, is finally helping struggling homeowners refinance.
Few of the Obama administration’s economic policy choices were more derided—by the left and right—than its mortgage-modification plans. The centerpiece of its foreclosure prevention policy, HAMP, was announced in early 2009
and promised to give money to banks to help modify between three and
four million mortgages. Doing so would make it easier for homeowners to
avoid foreclosure. More than four years later, there have been just 1.2
million permanent modifications (PDF).
Another
component of the administration’s housing policy was HARP, the Home
Affordable Refinance Program. HARP was aimed at letting homeowners who
are underwater—living in homes that are less valuable than the
outstanding mortgage—prepay their current mortgage and refinance into a
lower-rate loan. If a homeowner’s mortgage was purchased by Fannie Mae
or Freddie Mac before a certain date and the owner remained current on
the mortgage, the idea was that the borrower could get a new loan at the
lower prevailing rate. The program was designed to help homeowners who
were the worst hit by the collapse in home values save on their monthly
mortgage payments and take advantage of low rates.
A
government program was necessary, because banks typically won’t
refinance underwater owners. And as a result, the record-low mortgage
rates weren’t trickling down to struggling homeowners.
But
HARP has hardly been melodious. Through March 2012, HARP was only
permitted to refinance mortgages that were up to 125 percent of the
value of a home. But changes to the program, which were announced in
October 2011 and took effect in March 2012, eliminated the loan-to-value
cap, got rid of some fees, and extended the program’s life from
December 31, 2012 to December 31, 2013.
These
changes have made a big difference. The data shows a real effect for
underwater homeowners and high levels of refinances driven by very low
mortgage rates—3.4 percent for a 30-year fixed loan, a drop of more than
50 basis points since the beginning of the year, according to data from Freddie Mac. Data from Lenders Processing Services (PDF)
shows that prepayments—when homeowners pay off their mortgage ahead of
time— spiked in August and hit their highest level in seven years. That
makes sense in a time of high levels of refinancing. But according to
the LPS data, underwater borrowers are also prepaying at a much faster
clip. Among homeowners with a loan-to-value ratio of 120 percent or
more—meaning they would owe $120,000 on a house worth only
$100,000—there was a 65 percent jump in prepayments, from an 11.66
percent prepayment rate in January 2012 to a 19.27 percent prepayment
rate in August 2012.
Data
from the Mortgage Bankers’ Association released Wednesday showed
requests for refinances hit a three year high in the week ending
September 28. Mike Fratantoni, the MBA’s vice president of research and
economics, said in a statement
that “Refinance-application volume jumped to the highest level in more
than three years last week as each of the five mortgage rates in MBA's
survey dropped to new record lows in the survey.”
This
new data largely accords with data released by the FHFA showing a spike
in refinancing activity among underwater borrowers—even among deeply
underwater borrowers—since the changes in the HARP program went into
effect last March. From January 2012 through July 2012, the most recent
month for which the FHFA has data available, there have been 519,000
refinances through HARP. That compares with 400,000 refinances done in
all of 2011. Although the 1.4 million refinancings conducted through
HARP is still well short of the larger number the government promised
when the program was announced in 2009, there has still been a
significant uptick in activity.
The
increases in refinance activity in the FHFA data, like the more recent
LPS data, are the most dramatic for the most deeply underwater
homeowners. More than half of the 205,000 HARP refinances done for
homeowners whose mortgages are worth between 105 percent and 125 percent
of their homes have been completed this year. So far in 2012, almost
92,000 homeowners whose mortgages are worth more than 125 percent of
their home have been able to refinance.
Low
interest rates, and the announcement that the Fed will purchase $40
billion worth of mortgage backed securities issued by Fannie Mae and
Freddie Mac every month until the labor market substantially improves,
have combined to keep mortgage rates low. Low mortgage rates are a
deliberate part of the Fed’s actions to stimulate the economy. And
mortgage refinancing is one of the main “channels” for monetary policy
to work: when mortgage rates go down, people refinance into lower-rate
loans, and immediately have more money to spend each and every month
because less of their income is devoted to mortgage payments. William
Dudley, the president of the New York Fed, has described refinancing
as “an important channel through which lower interest rates support
spending and employment” and has supported aggressive programs to help
more underwater borrowers refinance. Until recently, however, this
channel didn’t deliver significant results to underwater borrowers. The Daily Beast
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