The administration has come out with an updated Home Affordable Refinance Program, what The Wall Street Journal‘s Smart Money calls HARP 2.0. With this improvement, underwater homeowners can refinance their mortgages at a lower rate if they have Freddie Mac- or Fannie Mae-backed mortgages, they’re current on their existing mortgages, and they’ve not missed a mortgage payment in the last six months and not more than one payment in the last twelve.
There are a number of items to consider, though. Why would anyone want to take the lender’s side of such a (refinanced) loan? The collateral offered has less value than the collateral that was offered for the original loan: it’s the same house, now devalued, often very significantly. This means that a lender that retains the loan in its portfolio is giving up one income stream for a smaller income stream on a lower-valued home. This decrement often can be worth it, given the reduced loan to collateral value ratio associated with an increase in home value, but in this market…? Additionally, the lender that sells the loan to a packager or another loan servicer is going to get a smaller sales price for the refinanced loan, since both the collateral and the income stream are smaller.
On the other side of such loans, the borrowers still will be underwater. To be sure, this isn’t a problem for lenders whose borrowers in good standing or for borrowers who aren’t trying to sell, but is a problem for borrowers looking to relocate—to a different job in a different city, or to a job at all in a different city. But these borrowers aren’t trying to refinance.
There are mechanical problems with HARP 2.0, also. Even though the Luddites who underwrite loans manually can begin using the program now, the government’s IT whiz kids won’t have the software in place to support the new rules until early February for Freddie Mac-backed mortgages or March for Fannie Mae-backed mortgages. This shouldn’t be surprising, though: this performance is of a kind with the government’s IT performance with the IRS’ “upgrade” of their computer systems and of OPM’s government jobs Web site. Still, I remain amazed that, given as long as the government has known about this HARP variation, the software requirements weren’t able to be satisfied already, much less won’t be for another three+ months.
But beyond the bureaucrats’ lack of thought about how much this this program actually is going to accomplish, the lack of consideration for consequences or for history is…apparent. Consider what the government holds out as selling points for this update:
- borrowers who apply to the same lender to whom they make their monthly payments won’t have their credit scores checked, and
- borrowers won’t be required to provide documentation proving their income.
This just repeats the mistakes that contributed to the housing bubble and burst in the first place: