Waiting for HARP 3 to pass Congress? Your wait may be just about over.
Within days or weeks, congressional representative Mel Watts is expected to be confirmed as the new head of the Federal Housing Finance Agency (FHFA). The controls Fannie Mae and Freddie Mac and administers the Home Affordable Refinance Program (HARP).
HARP was expanded once under current FHFA director, Ed DeMarco but little progress has been made with the program since. With Watts at the helm, the FHFA is expected to overhaul HARP a second time to provide additional aid to troubled U.S. homeowners.
HARP 3 could be here in December.
What Is HARP?
HARP is an acronym. It stands for Home Affordable Refinance Program.
HARP is an economic stimulus program. It was first launched in March 2009 using monies from the Housing and Recovery Act. The premise of the program was to help U.S. homeowners whose homes had lost equity to get access to the day’s falling mortgage rates.
Mortgage rates had dropped 1.50 percentage points in the seven months preceding HARP’s launch. U.S. homeowners were eager to refinance. However, few could.
Prior to HARP, homeowners whose homes had lost equity were ineligible to refinance without paying private mortgage insurance (PMI) for which costs were exploding; or, without reducing their existing loan balance to 80% loan-to-value at closing, which was often costly given sharply falling home values in many U.S. states.
HARP instructed lenders to ignore mortgage insurance requirements and to waive loan-to-value restrictions. HARP only required that homeowners have a mortgage backed by Fannie Mae or Freddie Mac, and a reasonable strong payment history.
The typical HARP household was expected to save $3,000 annually via refinance — a projection soon revealed to be overly conservative. As mortgage rates dipped into the 4s and household savings multiplied, it became clear that HARP was a hit.
However, the program was less-than-perfect, in some respects.
As one example, HARP guidelines included a 125% loan-to-value limit which meant that loans over 125% LTV could not be HARP-eligible.
The guideline had little effect on homeowners in cities such Boston, Massachusetts; Denver, Colorado; or Cincinnati, Ohio where home values fell only modestly last decade. For homeowners in hard-hit cities, though, including Phoenix, Arizona; San Francisco, California; and Las Vegas, Nevada, HARP remained out of reach.
As another example, the language of the Home Affordable Refinance Program was written such that refinancing lenders were responsible for any underwriting errors made by the loan’s former mortgage lender. If Wells Fargo refinanced a Countrywide mortgage via HARP, then, Wells Fargo would be responsible for Countrywide’s due diligence on the loan.
This liability clause created risk for HARP lenders so many simply elected to refinance their own loans only. This was known as “same-servicer” refinancing. You could only refinance a Wells Fargo loan with Wells Fargo; a Bank of America loan with Bank of America; a Chase loan with Chase; and so on.
HARP was expected to reach 7 million households but, after nearly years, it had failed to reach even one million. That’s when the FHFA revamped and released the HARP mortgage program, which came to be known as HARP 2.0.
HARP 2.0 Expands The HARP Program
“HARP 2.0” was the government’s response to sagging HARP refinance figures.
Fewer than 1 million homes had been refinanced between the program’s launch date and late-2011. So, to boost the program’s adoption rate, Fannie Mae and Freddie Mac re-released the program, removing some of its restrictions.
There were several big changes between HARP 1 and HARP 2. However, two key elements drove the program’s success. The first was the removal of the HARP loan-to-value restriction.
With HARP 2, mortgage lenders were instructed to ignore a home’s current value and to refinance it anyway. Loans above 125% LTV were welcome under HARP 2, which rendered millions of additional homeowners eligible for the underwater mortgage program.
Homeowners flocked to HARP.
In the first month during which the revamped program was widely-available, more than 40 percent of closed HARP loans were for homeowners with a loan-to-value exceeding 125% — loans which would have been impossible under HARP 1.
Plus, the number of closed loans topped 100,000 in a month for the first time in the program’s existence.
The second big change was linked to lenders.
Under HARP 2, Fannie Mae and Freddie Mac stopped holding mortgage lenders responsible for the underwriting errors made by a different bank. In removing this risk, the FHFA gave banks confidence to do additional HARP loans nationwide. “Same-servicer” requirements no longer applied.
Not surprisingly, HARP 2 was a hit. More than 1 million loans closed in the program’s first 12 months — more than during the preceding three years combined. However, since April 2013, HARP volume has slowed.
There were fewer Home Affordable Refinance closings in August than during any month since HARP 2’s launch. The program may be readying for an overhaul. HARP 3 may launch within weeks.
HARP 3 Comes Closer To A Launch Date
HARP 3 is the next release of HARP. It’s a program which has been talked about for months, but not yet made into law.
The passage of HARP 3 grows more likely with Mel Watts at the helm of the FHFA because, as a congressman, Watt pushed for homeowner assistance programs and increased access to credit. He is expected to continue that advocacy as head of Fannie Mae and Freddie Mac.
For homeowners, this could lead to a number of meaningful changes.
As one example, 2014 conforming loan limits would be less likely to reduce from their current levels of up to $625,500 in high-cost markets, and $417,000 everywhere else. Leaving conforming loan limits as-is through 2014 would allow Fannie Mae and Freddie Mac to back more loans for buyers which helps to keep loan costs low overall.
In addition, the new FHFA may reduce some of its guarantee fees — costs charged to lenders and passed on to consumers. “G-fees” have been steadily increased since early-2011 resulting in an increase to 30-year fixed rate mortgage rate of 0.500 percentage points or more.
Without FHFA G-fees, today’s mortgage rates would be lower.
However, it’s the passage of a HARP 3-like program that has U.S. homeowners excited. A revamp of HARP would likely expand the program to reach millions of additional households, and may even allow existing HARP homeowners to refinance via the program again.
Some of the potential HARP 3 enhancements include :
- Changing the program eligibility date : Currently, to be HARP-eligible, your loan must be originated no later than May 31, 2009. With HARP 3.0, eligibility dates may move into 2010 or 2011.
- Allowing non-Fannie Mae and non-Freddie Mac mortgages : Currently, only loans backed the FHFA are HARP-eligible. With HARP 3.0, eligibility may be extended to include Alt-A, subprime, and bank-held loans, too.
- Permit the refinance of an existing HARP loan : Currently, the HARP program is one-use only. With HARP 3.0, homeowners may be allowed to “Re-HARP” an existing HARP mortgage.
- Make HARP a true “streamlined” refinance : Currently, HARP requires some paperwork. With HARP 3.0, the program could mirror the streamlined programs of the FHA, VA and USDA for faster, simpler approvals.
Each of these enhancements would jump-start the Home Affordable Refinance Program and, by extension, the U.S. economy.
The typical HARP refinance reduces a homeowner’s monthly payment by 27%, a figure which far exceeds the government’s original estimates. Under HARP 3, Refinance volume would surge, consumer spending and savings rates would rise, and labor markets would expand.