The HARP Mortgage Bailout


A couple of weeks ago, President Obama asked his advisors to come up with ways he could bypass Congress to pursue his agenda.  “We’re not going to wait for Congress.  So my instruction to… all the advisers who are sitting around the table is, scour this report, identify all those areas in which we can act administratively without additional congressional authorization, and just get it done,” the President told his Jobs and Competitiveness Council.

It looks like one method of bypassing Congress will involve the Administration using executive fiat to mutate the Home Affordable Refinance Program, which was designed to avoid foreclosures by rearranging “underwater” mortgages.  As reported by Fox News:

Seeking to breathe new life into a sagging economy, President Obama will attempt an executive branch rescue of homeowners trying to refinance underwater mortgages, with a new initiative that lets people with little or no equity get a better interest rate at a reduced cost. 

The initiative, the first in a series of announcements expected this week by the president, applies to homeowners with federally guaranteed mortgages who are current on their payments. 

The revamped Home Affordable Refinance Program, which aims to avert foreclosures, is expected “to encourage new, lower-cost loans” to more homeowners who are paying more than the value of their properties, a senior administration official said ahead of Obama’s Monday announcement. 

 Fox goes on to explain that “The change is not a mass refinancing of everyone in America, but a targeted fix to open up the program to more people who are underwater.”  Specifically, the Administration wants to relax the eligibility requirements for HARP refinancing, which currently include restrictions on how much the value of the old loan can exceed the current appraised value of the home.  The current program caps mortgages eligible for refinance at 125% of property value.

Reuters reports on some other proposed HARP modifications:

To encourage banks to participate in the program, FHFA is revamping it to protect lenders from having to buy back HARP loans if underwriting problems are later found. Banks will only have to verify that borrowers have made at least six of their last mortgage payments and the new rules eliminate the need for appraisals in most cases.

FHFA said government-controlled Fannie Mae and Freddie Mac will waive certain fees for borrowers that refinance into loans with a shorter term, such as 15 years, aiming to spur homeowners to pay down the amount they owe at a faster rate.

In other words, this is a hair of the subprime mortgage dog: drop all those pesky eligibility requirements and throw low-interest restructured loans at those who made the worst deals on expensive properties at the height of the real-estate boom.  Among the most important remaining restrictions would be the requirement that refinance candidates must have made their existing mortgage payments on time for the last six months.

Of course, the targets of this new anything-goes mortgage bonanza are already on the hook for Fannie Mae and Freddie Mac loans, so this is a desperate attempt to keep them from foreclosing by landing them lower-interest loans, and therefore lower monthly payments, with minimal out-of-pocket costs.

Mortgage default is, obviously, bad for everyone involved.  The bank loses the rest of its loan, homeowners lose the property they’ve been making payments on, and the property loses about 30% of its value, on average.

The kind of refinance program Obama is pushing, however, has very little effect on the problem.  How many families looking at foreclosure to escape a $1500 mortgage are going to change their minds because it drops to $1200 or $1300… especially if long-term unemployment, Obama’s major enduring “accomplishment” as president, is the reason they’re in trouble?

The existing HARP program had far fewer applicants than anticipated, and it wasn’t because of tough loan requirements, as the Wall Street Journal explained shortly after the program began in 2009:

When the Home Affordable Refinance Program, or HARP, was rolled out in March, the Obama administration said that millions of borrowers would be able to refinance. By the end of July, just 60,000 borrowers had refinanced through the program.

Treasury officials say that the program was slowed by a plunge in mortgage rates that sparked a flood in refinance applications just as the administration rolled out the program. Thus banks were busy refinancing “run-of-the-mill” mortgage applications before moving on to HARP applications, which could be more complex to process. By then, mortgage rates had risen.

That was written in September 2009; the number of HARP borrowers has risen to about 810,000 since then, which is still far below the 5 million applicants originally hoped for.

In short, homeowners looking for a reasonable refinance plan were having no trouble finding one outside of this government program.  Perhaps the new Obama proposal would ease up on the complexity of the loan application process and win some more folks over – but did complex requirements really dissuade a lot of otherwise eligible candidates on the verge of foreclosure, who could have saved their homes by filling out some extra paperwork?

The Washington Post reports that the Congressional Budget Office made some projections for a super-HARP program, matching the Obama proposal closely but not perfectly, and the results were not overwhelming:

Here’s what the CBO predicts the results would be: About 2.9 million homeowners would take the government up on its offer, saving $7.4 billion in lower monthly payments in the first year alone. An additional 111,000 borrowers would avoid default, which would, in itself, save Fannie Mae and Freddie Mac—and hence taxpayers—$3.9 billion.

Against that, however, government investors in mortgage-backed securities—including Treasury, the Federal Reserve, Fannie, and Freddie—would lose about $4.5 billion, as loans get paid off early. So the net cost to the government would be pretty modest. Private investors in mortgage-backed securities, meanwhile— a group that includes banks, pension funds, mutual funds, etc.—would take a hit of about $13 billion to $15 billion.

So another $4.5 billion gets tacked onto the national debt that we’re not supposed to worry about until it blows up in our faces, the private bankers hated so extravagantly by the “Occupy Wall Street” crowd lose $13 to $15 billion, and a small but significant percentage of distressed mortgages are saved from foreclosure… at least temporarily. 

It’s a Band-Aid, but it’s a colorful Band-Aid that can be brandished during the aggressive new Obama 2012 campaign, in which Barack Obama runs against the demons of Wall Street, the institutionally unpopular Congress, and whoever that guy living in the White House from 2009 to 2011 was.