The Federal Housing Finance Agency (FHFA) released its September 2012 Refinance Report (Report) on Nov. 28, 2012.1 The Report provides some statistical information, most of which comes as no surprise to mortgage industry participants, while there are some tidbits of data that seem to demonstrate the impact of the Home Affordable Refinance Program, known as HARP, on the GSEs (viz., Fannie Mae and Freddie Mac). The end date for HARP was extended until Dec. 31, 2013 for loans originally sold to the GSEs on or before May 31, 2009.
HARP was established in 2009 to assist homeowners who are unable to access refinance due to a decline in their home value. The program was originally designed to provide these borrowers with an opportunity to refinance by permitting the transfer of existing mortgage insurance to their newly refinanced loan, or by allowing those without mortgage insurance on their previous loan to refinance without obtaining new coverage.
The premises for HARP are simply stated, as follows:
1. Since the GSEs are already responsible for certain high LTV loans; and
2. Default risk is lowered by allowing a refinance of these high LTV loans; therefore,
3. HARP loans refinancing high LTV loans at lower rates reduce default risk.
One of my concerns with HARP, or as it is referred to now HARP 2.0, is it has failed homeowners because it just is not reaching enough qualified borrowers and many lenders take too long to issue approvals. Another concern is the differentially higher interest rate that some lenders charge underwater borrowers versus the current market rate.
A remedy to borrower eligibility would be to have the government expand its guidelines to include non-agency lenders and by removing certain features of the 2009 origination qualifier. Also, low credit scores remain an obstacle by preventing underwater homeowners from taking full advantage of the current HARP guidelines with respect to their eligibility for refinance transactions.
HARP has obviously triggered a wave of refinance activity, just as expected. In speaking with some of our clients that are very much involved in HARP refinances, it seems that about 50 percent to 75 percent of their refinance business may be coming from homeowners who have LTVs above 125 percent. Because the 125 percent ceiling on LTV was removed, some lenders are actually refinancing LTVs of 155 percent.
In the following discussion, I will offer some perspectives to HARP's most recent survey.
►More than 90,000 homeowners refinanced their mortgage in September 2012 through HARP with more than 709,000 loans refinanced since the beginning of CY2012.
►Since the program’s inception in 2009, the government-sponsored enterprises (GSEs) have financed more than 1.7 million loans through HARP.
►In September 2012, half of the loans refinanced through HARP had LTV of greater than 105% and one-fourth had LTVs greater than 125 percent.
►In September 2012, 19 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages.
►HARP refinances in September 2012 represented 45 percent of total refinances in states hard hit by the housing downturn—Nevada, Arizona, Florida and Georgia—compared with 21 percent of total refinances nationwide.
►In September 2012, HARP refinances for borrowers with LTV ratios greater than 105 percent accounted for more than 70 percent of HARP volume in Nevada, Arizona and Florida and more than 60 percent of the HARP refinances in California.
HARP refinance, quarterly volume
HARP volume continued to represent a material portion of total refinance volume in 2012 as HARP enhancements took effect in the first half of CY2012. HARP volume represented 24 percent of total refinance volume in the third quarter of 2012.
Monthly HARP volume by LTV
The number of completed HARP refinances reported for deeply underwater borrowers continued to represent a significant portion of total HARP volume. In September 2012, 26 percent of the loans refinanced through HARP were at a LTV greater than 125 percent.
Percentage of HARP refis by LTV
Borrowers in September 2012, with LTVs greater than 105 percent, continued to account for half the volume of HARP loans.
Mortgage terms, LTVs greater than 105 percent
In September 2012, 19 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages.
Total HARP as percentage of total refinances
HARP continued to account for a substantial portion of total refinance volume in certain states. In September 2012, HARP refinances represented 45% or more of total refinances in Nevada, Arizona, Florida and Georgia, compared to 21% of total refinances nationwide.
HARP LTV >105 percent percentage of total HARP
Underwater borrowers accounted for a large portion of HARP refinances in a number of states. In Nevada, Arizona and Florida, underwater borrowers represented over 70 percent of HARP volume, and in California they represented more than 60 percent of HARP refinances.
Timeline for interest rate changes
I would like to set forth a timeline outlining certain highlights in interest rate changes since 2008. This information is worth noting, when considering the rates and fees charged to underwater borrowers by lenders and servicers. It helps to further contextualize the rate changes and the availability of a market rate for HARP refinance transactions.
►6.48 percent. Highest rate reached in 2008 for a 30-year mortgage.
►6.04 percent. GSEs placed into conservatorship on 09/06/08.
►5.29 percent. Fed announces MBS purchase program on 11/25/08.
►5.00 percent. Obama Administration announces Making Home Affordable announcement (02/20/09).
►5.42 percent. Treasury rates sharply rose and reached a 2009 high on a better than expected June unemployment report.
►4.93 percent. Treasury rates fell sharply after Dubai sought to delay sovereign debt payments.
►4.97 percent. Treasury Rates rose on optimism of a recovering U.S. economy and a temporary lull in news of a developing debt crisis in Europe.
►4.17 percent. 30-year mortgage rates reached percentage in early November, marking the lowest level observed since Freddie Mac began tracking rates in 1971.
►4.51 percent. Treasury rates fell amid ongoing concerns of a growing debt crisis in Europe.
►3.95 percent. Refinance volume surged in March and dipped in April, as GSE seller/servicers completed refinancings ahead of a 10 basis point guarantee fee increase that took effect April 1, 2012, mandated by the Temporary Payroll Tax Cut Continuation Act of 2011.
►3.47 percent. 30-year mortgage rates reached new historic lows in September 2012. Refinance volume rose in September as 30-year mortgage rates reached new record lows.
The borrower: Trapped or liberated?
There has been some controversy involving HARP 2.0. One concern involves the servicers’ right to set the fees on refinances, such fees being a highly profitable revenue source for servicers. The total revenue has been estimated to be in excess of $12 billion for CY2012. The borrowers who refinance through HARP may save as much as $5 billion in the same timeframe.
Since HARP enables borrowers to refinance with existing lenders, there is an opportunity for consumer financial abuse when a lender charges such “captive customers” an above-market interest rate. And, surveys are showing that borrowers who use their existing lenders constitute nearly 75 percent of HARP refinance transactions.
The result, from the consumer’s perspective, is that existing lenders and the servicers are in a position to charge considerably higher fees. This takes on an even more potentially pernicious aspect when certain lenders, through their servicing platforms, only permit underwater borrowers to refinance above a specific loan-to-value ratio. There have been some studies of the increased premium. I have heard a range of 0.25 percent to 0.75 percent premium that is being charged to underwater borrowers.
The Obama Administration had wanted the FHFA to use HARP as a means to stem the avalanche of underwater borrowers. These are Fannie and Freddie loans. Yet the FHFA has yet to adequately police the higher rates charged on HARP transactions; indeed, it would seem that the FHFA does not even acknowledge this condition exists.
The underwater borrower is still getting a reduced rate through HARP, but it may not be the market rate, and that is the crux of the issue. That difference between the market rate and the rate given to the underwater borrower is all new revenue to lenders. Claiming an increased risk requires an increased rate is not a defensible view, where HARP actually provides lenders with a waiver of liability—which, surely, may be seen as a government subsidy—with respect to representation and warranty claims.
Jonathan Foxx, former chief compliance officer for two of the country’s top publicly-traded residential mortgage loan originators, is the president and managing director of Lenders Compliance Group, a mortgage risk management firm devoted to providing regulatory compliance advice and counsel to the mortgage industry. He may be contacted at (516) 442-3456 or by e-mail at [email protected]
1-Refinance Report September 2012, Federal Housing Finance Agency, 11/28/12. This document may be downloaded from my firm’s Library at www.LendersComplianceGroup.com or from the Federal Housing Finance Agency’s Web site.