Barely a month into President Barack Obama's presidency, his administration announced a major effort to help millions of underwater homeowners who owed more on their mortgages than their homes were worth refinance into lower interest rate mortgages. But the Home Affordable Refinance Program, or HARP, fell short, in large part because it came with numerous limitations that stifled its effectiveness. With borrowers and lenders alike staying away in droves, the Obama administration is now set to finalize new rules on a more accessible plan, dubbed "HARP 2.0," in the hope this will finally give a jolt to the nation's sluggish housing market. Economists say doing so could also give a kick start to the economies in communities where the housing crash has been particularly rough. "Any refinancing plan that frees up disposable income would in theory help the economy," says Ryan Sharp, executive director of the Center for Strategic Economic Research in Sacramento, California. "If people are able to refinance and recycle that disposable income throughout the region, then it will help the overall economy." Making HARP 2.0 work begins with getting troubled borrowers to use the program. The initial HARP was introduced in 2009 to help homeowners with distressed loans backed by the Federal National Mortgage Association, Fannie Mae, or the Federal Home Mortgage Association, Freddie Mac, two government-secured enterprises that together hold about 60 percent of all the country's mortgages. The idea was to help a specific group of Fannie- and Freddie-backed borrowers: those who were underwater with their loans and locked into high interest rates but who still had good credit and had consistently stayed current with their payments. These borrowers were thought to be the ones who would eventually be most likely to walk away from their homes. But that plan also encountered difficulties. HARP was available only to homeowners whose loans did not exceed a 125 percent loan-to-value (LTV) ratio. Many who had purchased at the height of the housing bubble were well in excess of this limit. Lenders also balked at a requirement to guarantee that a borrower's original loan met all of Fannie and Freddie's standards, which could have resulted in them being forced to buy back refinanced loans that were later found to have some problem. And a HARP refinance was also not available to homeowners whose loans were not obtained by Fannie or Freddie before May 2009. Although the Obama administration estimated that HARP would help refinance as many as 5 million loans, less than a million homeowners wound up using the program. While HARP 2.0 still has the May 2009 purchase deadline, the new rules - which will be officially released on March 15 - toss out the 125 percent cap and the need for a new property appraisal. The administration has also indicated it will no longer force lenders to buy back bad loans. Although most economic experts say anything that sparks the housing market will help the economy, perspectives vary on just how much the new rules will actually accomplish. Rob Nunziata, co-CEO of FBC Mortgage in Orlando, believes HARP 2.0's relaxed requirements will definitely help in Florida, one of the states hardest hit by the housing collapse. "This is going to mean everything," he says. "For the majority of distressed borrowers in Florida, the 125 percent LTV cap in the original HARP program simply did not offer any help. Just removing that cap will mean an awful lot." Tim Ross, president and CEO of Ross Mortgage Corporation in Royal Oaks, Michigan, also believes the plan could be quite successful. But he says that will depend on several factors, including how the secondary lending market reacts to the plan. "Is the secondary market going to offer a refinance loan at a low 4 percent interest rate identical to that of a highly qualified original loan applicant with a large down payment?" he says. "Typically, that refinance loan will be priced to the risk involved, but if the premium to be paid on one of these HARP 2.0 loans - and there likely will be a premium - is too great, then a lot less people will be helped." Estimates of how many homeowners will take advantage of the new rules also vary. Freddie Mac has conservatively estimated HARP 2.0 refinances will "roughly double or more" the number done under the original program, while Moody's Analytics predicts around 1.6 million new refinances. Meanwhile, another study released by San Diego-based Data Quick in February says the removal of the 125 percent loan-to-value cap alone will qualify up to 6.7 million more homeowners than under the old rules. But even if the bulk of eligible homeowners take advantage of HARP 2.0, some observers question its overall economic potential. Core Logic's Fleming predicts that while the program "constitutes a significant economic stimulus on the order of several billion dollars given to borrowers in many of the economically hardest hit areas," it will have only "modest impact on consumption and the economy." Jeffrey Michael, director of the University of the Pacific Business Forecasting Center in Stockton, California - another of the communities hardest hit by the housing collapse, with mortgages averaging 175 percent loan-to-value - also questions how much HARP 2.0 will help his area's fiscal health. "Anything that helps to fend off foreclosures helps the region," he says. "But I think it helps at the margins and not much else." One major reason for that, Michael says, is the sheer enormity of the problem. CoreLogic data indicates that more than 20 million homeowners nationwide "have insufficient or negative equity positions in their homes," with 4.7 million underwater by 25 percent or more. Nevada and Florida lead the nation in distressed mortgages, at 60 percent and 45 percent respectively, with states like Michigan and California close behind. States, meanwhile, have not stood by idly. According to Heather Morton, who tracks banking issues for the National Conference of State Legislatures, states were addressing the foreclosure issue even before the Great Recession began. "States have averaged about 300 bills a year since 2007," she says, many of those aimed at helping bring distressed borrowers together with lenders so the parties can work out amicable solutions that fit each of their needs. "No one solution is a fit for everyone," she says. "What works in one state or neighborhood may not be a good fit in another." Many of those measures also have dealt with mortgage fraud and unscrupulous lending practices, something that recently garnered states a $26 billion settlement from the nation's largest banks. Although those funds are supposed to be used to further help distressed homeowners, several states, including Missouri, Wisconsin, Pennsylvania, Vermont and Maryland, have already indicated they will put at least some of the windfall toward other budgetary problems (see Budget & taxes in this issue). The latest HARP program is also only one of several the federal government has used in an attempt to quell the foreclosure crisis. The president has further advocated loosening the rules on HARP's sister program, the Home Affordable Modification Program, or HAMP, which is for those borrowers who have crossed over into delinquency or are near doing so. In his State of the Union address in January, President Obama proposed opening HARP 2.0 up to distressed borrowers with loans not backed by Freddie Mac or Fannie Mae. Jonathon Lederer, president of Lederer Private Wealth Management LLC in Sacramento, is a fan of the latter proposal. He believes allowing all underwater borrowers to refinance under HARP 2.0, regardless of being Fannie- or Freddie-backed, would definitely help the economy "get at least a short term boost." To pay for doing that, the president wants to tax big-ticket financial companies, those with $50 billion or more in assets. But Michael notes that such a fee would require Congressional approval, something far from certain in Washington's hyper-partisan environment. "It really would have been good to see something like this sooner," says Michael. "The president should have sent this to Congress when he had control of it." Other challenges abound as well. Gary Hurst, a senior loan consultant at Pacific National Lending in Gold River, California, notes that HARP 2.0 "does nothing directly to stimulate housing demand for new borrowers and investors or reduce the high inventories of distressed properties." Unemployment, while slowly improving, is also still a significant problem for many Americans, making refinance an unrealistic option. And even if everything goes smoothly for the bulk of loan applicants, Lederer says history doesn't bode well for HARP's economic potential. "The question is whether people who get to refinance would return to their previous spending patterns," he says. "Historically, for five to six years after a downturn people are much more cautious, much more likely to de-leverage rather than to spend, which is what grows the economy. Without that return, a short-term boost may be all we get." Even so, Michael says any effort to ward off foreclosures is worth investigating. "There is definitely a reason to address it," he says. "Right now the real incentive is for people to go to foreclosure, which is really harmful. Foreclosures are dragging down the economy and doing all sorts of damage to neighborhoods."
- By RICH EHISEN
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