Reaching for the Underwater, Responsible Borrower Through HARP

Lawmakers seated on the ""Senate Banking Committee"":http://banking.senate.gov/public/ convened a hearing Wednesday to discuss ways to make Home Affordable Refinance Program (HARP) a more effective and accessible option for responsible, underwater borrowers.

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The message from those testifying: More refinance modifications would help, but beware of the impact for investors and lenders.

""Debra Still"":http://www.mortgagebankers.org/DebraStillCMBbio.htm, chairman-elect of the ""Mortgage Bankers Association"":http://www.mortgagebankers.org/default.htm, said that the trade group ""strongly supports"" any expansions that could widen the reach of the HARP as a result of legislation before the committee.

She underscored support for the removal of loan-to-value ratio restrictions and ""arbitrary"" requirements regarding who services loans.

Currently, only mortgages backed by Fannie Mae and Freddie Mac are eligible for refinancing under HARP.

""Such features only serve to increase borrower and lender confusion, and reduce the number of qualified borrowers who could benefit from the program,"" she told lawmakers in introductory remarks.

""Chris Mayer"":http://www4.gsb.columbia.edu/cbs-directory/detail/494803/Christopher+Mayer, a professor of real estate and finance at ""Columbia Business School"":http://www4.gsb.columbia.edu/ and an early proponent of refinance expansions that helped facilitate HARP 2.0, said that the refinance program would help homeowners but nodded at barriers, including rules that limit servicer buy-in.

""These adjustments were supposed to be focused on aiding underwater borrowers and increasing competition between servicers, but the results so far have failed to live up to this promise,"" he said.

The Obama administration moved on expansions to HARP last fall by working with the ""Federal Housing Finance Agency"":http://www.fhfa.gov/ (FHFA) to sign off on lower loan-to-value ratio requirements, remove obstacles for lenders and servicers, and allow homeowners to trade up on their mortgages at today's record-low rates.

Critics continue to find fault with the program by citing apparent problems with other loan modification programs, including the Home Affordable Mortgage Program (HAMP).

""Anthony Sanders"":http://mason.gmu.edu/~asander7/, professor of finance with ""George Mason University"":http://www.gmu.edu/, nodded at 14 federal loan modification programs currently in place, including HAMP and others under the ""Federal Housing Administration"":http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory, ""Treasury"":http://www.treasury.gov/Pages/default.aspx, and the ""Department of Veterans Affairs"":http://www.va.gov/.

""At some point, the collective impact of these programs could drive our banks into bankruptcy,"" he told lawmakers. ""This possibility must be included in the analysis before any further steps are taken.""

The cost to investors in mortgage debt and securities remains a critical issue on Capitol Hill. The FHFA generated criticism from the left earlier this year by resisting calls for principal reductions.

Mayer faulted the FHFA for resisting principal write downs, estimating that as many as 2 million to 3 million homeowners could refinance and prevent foreclosure if given the opportunity.

""Obviously the losers here are investors, but the investors have had an enormous windfall associated with this program,"" he said, referencing the explicit federal guarantees for mortgage debt owned by the GSEs.

He also cited a ""lack of competition"" as the most ""serious problem"" under HARP 2.0. He said that current HARP policies force lenders to assume liability for loans originated by others, discouraging lenders from refinancing loans accordingly.

This problem was echoed all around from those who provided testimony at the hearing, including Laurie Goodman, senior managing director at Amherst Securities Group, who said her number one suggestion is to allow for competition by permitting a different servicer to refinance a borrower on the same terms that apply to the current servicer.

""This will result in much better rates to the borrower, and much more refinancing of the targeted Home Affordable Refinance Program (HARP) population,"" said Goodman.

The debate over refinance expansions takes place amid election-year politics. Speaking before Congress in January, President ""Barack Obama"":http://www.whitehouse.gov/administration/president-obama pledged to roll out new refi modifications, together with new consumer financial investigations and a Homeowner's Bill of Rights.

It was not immediately clear when the Senate Banking Committee would move on legislation to widen HARP's reach.