HARP Briefing Paper: April 2013


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Recently, the Home Affordable Refinance Program, HARP, was extended for an additional two years. The Program now concludes December 31, 2015. We have been bullish on HARP since version 2.0 was announced in November 2011. We remain enthusiastically so. Read on
for our rationale. For more info: www.nafcu.org/mortgagecadence

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HARP Briefing Paper: April 2013

  1. 1. HARPBriefing Paper April 2013 Recently, the Home Affordable Refinance Program, HARP, was extended for an additional two years. The Program now concludes December 31, 2015. We have been bullish on HARP since version 2.0 was announced in November 2011. We remain enthusiastically so. Read on for our rationale. @ 2013 Mortgage Cadence, LLC Company. All Rights Reserved.
  2. 2. Table of Contents HARPBriefing Paper April 2013 Background 1 Good for Homeowners 2 Good for Homeowners, yet some are reluctant 3 Good for the Economy 4 Good for Lenders, too 5 What about Investors? 6 Good for Strategy 8 Have questions? Comments? Dan Green, EVP, Marketing, is happy to talk with you about this white paper and about HARP. Contact him at dgreen@mortgagecadence.com.
  3. 3. Background On April 11, 2013, Ed DeMarco, acting director of the Federal Housing Finance Agency, announced the extension of the Home Affordable Refinance Program (HARP) through December 31, 2015. HARP was originally created in 2009 by the Obama Administration as one of the ways lenders could help underwater homeowners, those who owe more on their homes than their homes are worth, refinance their mortgages thereby lowering their payments and allowing them to remain in their homes. DiMarco’s announcement is HARP’s fourth iteration: • HARP 1.0: Original Program launched in 2009 • HARP 2.0: Program guidelines expanded, lender reps and warrants reduced in November 2011 • HARP 3.0: Lender reps and warrants further reduced in mid-year 2012 • HARP 4.0: Program extended through December 31, 2015 To date FHFA estimates HARP has helped over 2 million homeowners. What the extension signals is that there are many more homeowners in need of assistance. While the exact number of underwater borrowers remains murky, estimates run as high as 7 million. The remaining eligible homeowners, some 5 million, could comprise as much as 60% of annual US mortgage market production. No more than 8 million loans will be originated in 2013 or 2014. The HARP opportunity is significant. 1
  4. 4. Good for Homeowners The easiest of all points to make: HARP is good for homeowners. The Program’s primary expectations are that refinancing puts responsible borrowers in a better position by reducing their monthly principal and interest payments, reducing their interest rate, reducing the amortization period, or moving them from a more risky loan structure (such as an interest-only mortgage or a short-term ARM) to a more stable product (such as a fixed- rate mortgage). A main objective of the program is to reduce the borrower’s monthly mortgage payment. Saving hundreds or even thousands of dollars per month is an obvious benefit. Recaptured cashflow can help with living and education expenses, education and retirement savings or simply help to build reserves against economic uncertainty. Regardless of how monthly mortgage savings are used, one thing is clear: they are recycled into the economy, adding stability and fueling economic growth. The aggregate amount of savings is nothing short of enormous. FHFA estimates 2.2 million homeowners have refinanced since HARP was originally launched. Assuming the average mortgage payment is reduced by $400 per month, total annual savings amounts to more than $10 billion. Further assuming all 7 million underwater homeowners reduce their payments by a like amount, total annual savings jumps to over $33 billion. To be eligible for a HARP refinance homeowners must meet the following criteria: • The loan must be owned or guaranteed by Fannie Mae or Freddie Mac. • The mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009. • The mortgage cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March-May, 2009. • The current loan-to-value (LTV) ratio must be greater than 80 percent. There is no maximum LTV limit for borrower eligibility. If the borrower refinances under HARP and their new loan is a fixed rate mortgage, there is no maximum LTV. If the borrower refinances and their new loan is an adjustable rate mortgage, their LTV may not be above 105 percent. • The borrower must be current on their mortgage payments with no late payments in the last 6 months and no more than one late payment in the last 12 months. 2
  5. 5. 3 Good for Homeowners, yet some are reluctant More than a few lenders report that it has been difficult to get some HARP-eligible borrowers to pay attention. The message seems simple enough. Refinance your loan, save hundreds, perhaps thousands of dollars per month. Yet not all borrowers respond. Some, when contacted repeatedly, ask to be removed from solicitation lists. Perhaps it is a sign of the times and of the hard-learned mortgage lessons of the last five years. An offer seemingly too good to be true must, in fact, be so. Borrowers are much more savvy in 2013 as a result of the deals offered in the run-up to the housing bubble. Yet the question still remains: what is the best way to get their attention? FHFA thinks it has an answer. It will soon launch a nationwide campaign to inform homeowners about HARP. This campaign will educate consumers about HARP and its eligibility requirements and motivate them to explore their options and utilize the Program before it ends.
  6. 6. Good for the Economy The idea behind HARP is to help underwater homeowners who have consistently made their mortgage payments realize the same refinance benefit as all other borrowers. Keeping them in their homes is obviously good for them. It is good for their communities, as well. Vacant homes create a multitude of problems, all of which are a drag on the economy. Is it working? While HARP alone cannot be given full credit, evidence that it is helping has been in the news over the past several weeks. In an April 11 story Housingwire reported that foreclosure filings in the first quarter of the year plummeted to six year lows. According to the story, which cited a report from RealtyTrac, the US recorded 442,117 foreclosure filings in the first quarter of 2013, a steep 23% drop from a year ago and the lowest level reached since 2007. This is good news. It does not mean, however, that foreclosure filings are down in every market; there are some notable exceptions around the country, especially those with judicial foreclosure systems. Shadow inventory is down, too, and markedly so. Housingwire also reported in a story on March 26, 2013, that from its peak three years ago, the nation’s shadow inventory has fallen 28%, according to a study conducted by CoreLogic. There is still more positive news. A recent survey conducted by FICO Labs of housing finance risk professionals revealed that 70% believed housing prices are rising at a sustainable pace. The housing market is turning the corner. HARP is just one reason, and an important one. It can do more good, and provide additional fuel for the recovering housing market. More HARP loans will translate to a stronger, faster economic recovery. 4
  7. 7. Good for Lenders, too The main lender concern with HARP has been increased risk, especially as it relates to representations and warranties. The specific concern is the greater potential for loan repurchase requests. Fannie Mae addresses this concern in several recent publications including its Home Affordable Refinance FAQs published on March 8, 2013. The FAQ is helpful, detailed and clear. It is a must-read for all HARP lenders. While the details are extremely important, one way to think about HARP and rep and warrant risk is to break potential HARP loans into two broad categories: 1. Same Servicer. Same servicer loans are the lender’s existing loans. Assuming these loans meet HARP criteria, no additional representation and warranty risk is incurred. Default risk, a wholly different matter, decreases since a borrower’s payment is reduced and their cashflow is improved. Homeowners may also now be in a more stable financing structure (from an interest-only, for instance, into a 30-year fixed mortgage) which improves their long-term outlook. 2. Other Servicer. HARP 2.0 expanded the Program to allow any lender to refinance any homeowner regardless of where the loan was financed originally. The important fact to note with this type of HARP loan is the lender that refinances the loan is not responsible for any of the representations and warranties associated with the original loan. The new loan must meet all other HARP criteria; the representation and warranty liability for the original loan remains with the original lender. Many lenders are investors, too. The next section discusses investor implications. 5
  8. 8. What about Investors? Aye, there’s the rub. Or is there? We have written and talked about HARP more than any other single mortgage lending topic. In every instance, we have discussed in detail how this Program is good for borrowers as well as lenders. But what about investors, as a commenter to one of our blog posts points out: …This is a perfect example of why the housing bubble is not fixed. I am glad people are refinancing to stay in their homes, but what you don’t say is that someone else is paying for this. An investor in mortgage pools (financial institution, insurance company, retirement company, 401k), gets a reduced interest rate on their investment (sometimes as low as 2%)… On one hand this statement is true. Someone is paying for this. That someone is investors. Investors in mortgage securities have seen their income on those securities decline as a result of HARP. We could stop there and agree, assuming all else was equal. All else is not equal, however. Here’s why. The Home Affordable Refinance Program allows underwater homeowners to do what above water homeowners are doing: refinance their mortgage to take advantage of today’s low rates. Who’s paying for that? The same investors. Their cash flows and yields have declined and always do when mortgage rates dip and borrowers refinance. HARP borrowers are simply doing the same. 6
  9. 9. Take this one step further. Let’s say you are an investor who bought 10, 6.00%, $200,000 30-year mortgage loans at the height of the boom in 2007. Let’s further assume 9 of the 10 homeowners remained above water throughout the housing crisis. Being prudent each of them refinanced into a new 30-year loan at 3.50% in 2012. The coupon rate on your investment dropped 2.50% on 9 loans decreasing your yield and your cashflow. That’s mortgage investing and one of the risks investors run. What about the 10th loan? It, of course, is underwater, which happened within a year of closing. This fact alone is not a big deal, but there’s more: the borrower’s income dropped as a result of the economy making their mortgage payment uncomfortably unaffordable. Even so, they made every payment on time. When HARP 1.0 was announced they were hopeful they would get relief but discovered they were not eligible. They marshaled on, continuing to make their payments even though it was a struggle. In late 2011 they had about tapped their resources and were facing reality: unable to refinance they would have to give up their home. Then HARP 2.0 is announced. Our borrower qualifies for the Program, refinances their loan, saving approximately $350 per month on their payment. The investor’s cashflow drops by a like amount, yet the 10th borrower is now at parity with the other 9. This is a good outcome for the borrower. Is it a good outcome for the investor? In a word, yes. The borrower was on the verge of default; when that happens, the investor writes off the principal amount of the loan and foregoes the interest thereby considerably reducing yield and cashflow. On the theory, and the practice, that some income is better than no income and that losses are bad, this is a favorable outcome for all and no more of a benefit for the underwater homeowner than the other nine borrowers received. QED. 7
  10. 10. Good for Strategy While not yet robust, a competitive real estate market is emerging. New headlines appear almost daily about housing: housing starts are up, home values are increasing, foreclosures are down, rates remain low. Good news is beginning to flow rather than trickle. Refinance-oriented lending cannot last forever. At some point the last homeowner who hasn’t refinanced will do so, bringing to a close the longest refinance cycle in US lending history. What lies ahead will be one of the longest purchase-money cycles since the 1950s. HARP, especially with its extension, may well provide the bridge between refinance and this sustained purchase lending market. What to do? Two things, at least: 1. Work with the agencies, Freddie Mac and Fannie Mae. They have access to data on loans sold to them. Using this data they can work with you and your teams to identify eligible HARP loans. 2. Market. With the targeted list of borrowers in hand, use Fannie Mae and Freddie Mac’s HARP-specific marketing collateral to raise awareness, and, potentially, convince those borrowers who have been reluctant to take advantage of the Program. Follow this link for more information. Get involved. Embrace HARP. The Program is good for everyone in the mortgage and housing markets. 8
  11. 11. @ 2013 Mortgage Cadence, LLC Company. All Rights Reserved. 888.462.2336 mortgagecadence.com info@mortgagecadence.com HARPBriefing Paper April 2013 For more information on HARP please see our first HARP Briefing Paper, published during the first quarter of 2012.  It is available on our website by clicking here.