Expanding HARP to Prevent Defaults and Stimulate Economy

While seeming to recover, the housing market is still undoubtedly fragile, and there are millions of underwater borrowers who continue to struggle with making payments. While HARP proposes to address these concerns, the program has been limited in its ability to reach the masses.

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Through the Responsible Homeowner Refinancing Act of 2012 introduced by Democratic Sens. Bob Menendez (D-New Jersey) and Barbara Boxer (D-California), a new HARP 3.0 would break down barriers preventing millions more from refinancing.

During a ""hearing"":http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=2ae1369e-e8bb-4c5b-80a3-ba090b901d47 on Thursday before a senate subcommittee, industry experts and leaders offered testimony on how the proposed legislation could impact the economy.

Mark Zandi, chief economist for Moody's Analytics, delivered a testimony in which he said, “Policymakers should act to substantially increase mortgage refinancing activity.”

When first introduced, the Obama administration expected HARP to refinance between 4 and 5 million homeowners, but FHFA estimates show that since its 2009 inception, the program has refinanced close to 1.1 million borrowers as of February 2012.

In late 2011, HARP underwent an expansion to allow borrowers with loan-to-value (LTV) ratios higher than 125 percent to apply, among other changes.

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Acknowledging that it takes time for servicers to implement new changes, Zandi said in his written testimony that HARP refinancings in early 2012 appear to have run close to 50,000 per month, up from 30,000 per month since the program began. Zandi also noted reports from the Mortgage Banks Association showing a pickup in applications for refinancing.

While these changes have helped to encourage more activity, Zandi expressed his support for more changes.

""More refinancing will mean fewer borrower defaults and more money in the pockets of homeowners, supporting the recovery through a quick and sizable cash infusion at no meaningful cost to taxpayers,"" he said.

If the proposed expansions are fully implemented, Zandi said the legislation would increase eligibility to nearly 21.5 million borrowers.

Under the Responsible Homeowners Act, borrowers with LTVs lower than 80 percent and non-GSE loans would be eligible for the program. Currently, HARP only includes Fannie Mae and Freddie Mac loans.

Overall, Zandi said the broader economy, taxpayers, and homeowners, who are expected to save $2,500 to $3,000 a year, will benefit from refinancing.

Though, Zandi does acknowledge a loss for one segment: investors in mortgage backed securities.

""While the agencies would lose some interest income on their $1.2 trillion in mortgage securities and whole mortgage loans, under reasonable assumptions that would be offset by lower default rates on refinanced loans,"" he said.

In a calculation, Zandi said HARP refinancings totaled 4.2 million, private investors would receive about $6.5 billion less in annual interest income.

While investors may not be pleased with their return due to low interest rates, Zandi said, ""they were aware of this prepayment risk when they purchased their securities.""