HARP's Dirty Little Secret: Most HARP Refis are of Positive Equity Mortgages
So the Administration has announced that it is expanding the HARP refinancing program to help underwater borrowers. Originally, HARP enabled borrowers with up to 125% loan-to-value (LTV) ratios to refinance (105% for adjustable rate loans). The revised program removes the LTV cap for fixed-rate loans, reduces some refi fees, permits refis of loans that have been mildly delinquent recently, and extends the eligibility date. All the news accounts have stated that the number of HARP refinancings is expected to roughly double, from about 900,000 refinancings to perhaps 1.8 million refinancings. This is trumpeted as a boon for underwater homeowners.
The revised program may well help some underwater homeowners lower their monthly payments. Unfortunately, the 900,000 and 1.8 million numbers are seriously deceptive. Most of the HARP refinancings to date have been for borrowers with positive equity. HARP has refinanced very few underwater borrowers. As of 2Q 2011, 92% of HARP refinancings (776,009 of 838,441) were of loans between 80% LTV and 105% LTV. Only 62,432 refis were between 105% and 125% LTV. In other words, HARP has provided very little help for underwater borrowers.
(It's not clear to me what makes a refi of a <100% LTV loan a HARP refi in the first place--it's defined by FHFA as a "Fannie Mae to Fannie Mae and Freddie Mac to Freddie Mac first lien refinance loans with limited and no cash out that are owner occupied with LTV's over 80 to 125." That means that an 80% Fannie to Fannie no cash out refi is counted as HARP, but that just looks like a regular refi to me. But that's another story.)
Recognizing that HARP hasn't helped very many underwater homeowners to date makes me skeptical that an increase in the HARP LTV limit will make a difference. If you can't get the 120% LTV homeowner to refi, what will get the 140% LTV homeowner in the door? (Indeed, since the 140% LTV mortgage isn't REMIC eligible, making the refinacing less attractive from the GSE end).
Recognizing that HARP hasn't helped very many underwater homeonwers also underscores a critical problem with the program: it's not a foreclosure prevention program. HARP refi recipients generally aren't avoiding foreclosure via because of HARP. If there's a job loss, a 4% mortgage is going to be hard to carry, just like a 6% mortgage. Instead, what's going on here is stimulus via subsidy. These homeowners are getting a new mortgage at a very low rate, subsidized ultimately by the taxpayer.
That might be great as a stimulus move, but I worry that it will set an expectation for homeowners going forward of 4% mortgages and that such an expectation will constraint the restructuring of the US housing finance system. What's worse is that it's a bailout of the wrong homeowners--HARP is directing help not to the homeowners most in need, but to those who are likely to hang on. If we're going to bail out homeowners, let's at least target the right ones.