Speculation: Fed is key ingredient for refinancing underwater borrowersby Tim Manni
Question1: What has been one of the biggest stumbling blocks of the HARP program?
The answer: A strong lack of investor participation.
While HARP, the federal program to refinance troubled mortgages, had been introduced with grandiose goals of helping millions of homeowners, the truth is, the program has fallen woefully short of its projected success. About 830,000 loans have gone through the program to date, but only 63,000 with LTVs from 105 percent to 125 percent have made it, and an estimated 20 percent or more of homeowners remain underwater.
Investors aren’t optimistic about investing in loans with high default rates, PMI issues, prepayments and record-low yields. A refinanced loan is also treated as a new mortgage, and that can expose the lender to buyback triggers if the loan should prove “defective.”
Question 2: Along with job creation, what’s the next biggest economic initiative the president has been touting recently?
Answer: An expanded refinance effort to include underwater homeowners who otherwise don’t qualify for HARP in its current structure.
In a recent speech, President Obama said, “To help responsible home owners, we’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent.” Such a move would “put more than $2,000 a year in a family’s pocketbook and give a lift to an economy still burdened by the drop in housing prices,” he added.
Is the Fed getting back in the mortgage game?
The two questions and answers above, in my opinion, all tie into the Fed’s decision to again purchase mortgage-backed securities, as announced on Wednesday.
Their renewed desire to purchase mortgage-backed securities makes me think that this may be the first step toward getting a more robust HARP program underway.
While the Fed’s program is only intended to re-invest proceeds from maturing instruments it holds, it might easily be modified or expanded to include or target very specific securities in the future.
Why do I think this?
For any expanded HARP program to work, lenders need to be willing to refinance the loans and someone has to be willing to invest in the securities they produce. If that investor agreed to accept the loans with no “push back” provision in case of defect, lenders would be more willing to do these kinds of refinances.
As such, with the Fed back buying mortgage-backed securities, there’s a willing investor, and one with a balance sheet that can easily handle loss and who probably cares more about economic benefit than individual profits and losses, anyway.
How would that work?
It’s rather simple:
Since Fannie and Freddie are already under the government’s control, it stands to reason that a large pool of underwater mortgages could be refinanced via HARP, packaged into mortgage-backed securities and sold to the Federal Reserve (again, who declared on Wednesday their renewed interest in purchasing mortgage investments).
This idea is speculative but certainly reasonable.
(Certainly, the FHFA—the GSEs’ regulator—would have to come on board, but the GSEs’ regulator has recently expressed a willingness to explore the idea of expanding refinancing opportunities for homeowners.)
Some more questions and answers
Question: Since investors have already shown little interest in HARP and its successes have been limited, why would Washington expand the refinance program?
Answer: Because there are political and economic benefits and because we know the Fed is interested and has the capability to make it work.
Question: Why would the Federal Reserve count on the fact that low or even lower interest rates will help turn this economy around?
Answer: Low rates on their own aren’t enough to move the economy forward.
However, pushing rates down further may force some investors to put their money in other places than ultra-safe investments if they hope to make any money. Low rates by themselves aren’t enough, but potentially millions of new refinances will put billions of dollars back into consumer pockets, and that may just be enough to do the trick.
The hidden gem
In conclusion, I think the Fed’s renewed interest in buying up mortgage-backed securities is the real hidden gem from Wednesday’s meeting, and might just be the beginning steps for an expansion of HARP to help refinance more underwater borrowers.
HSH.com VP Keith Gumbinger contributed to this post.