Administration officials unveiled a ""highly anticipated program"":http://dsnews.comarticles/administration-announces-refinance-program-for-underwater-borrowers-2011-10-24 last week aimed at allowing borrowers who owe significantly more than their home is worth take out new loans with lower interest rates.
[IMAGE] The initiative has taken the form of a newly revamped Home Affordable Refinance Program (HARP), which has been opened up to any borrower whose loan was sold to ""Fannie Mae"":http://www.fanniemae.com or ""Freddie Mac"":http://www.freddiemac.com prior to April 2009, as long as they are current on their payments and no matter how far underwater they are.
Mark Fleming, chief economist for ""CoreLogic"":http://www.corelogic.com says the impact of HARP 2.0 will be targeted to the housing markets and local economies that have suffered the most from the housing collapse.
Nationally, based on CoreLogicÃ¢â‚¬â„¢s quarterly analysis, there are more than 20 million borrowers who have insufficient or negative equity positions on their homes, taking into account all outstanding liens. The company says 4.7 million of these households are underwater by 25 percent or more.
Nevada and Florida rank 1st and 3rd for the highest levels of negative equity (60 percent and 45 percent, respectively) and account for 2.3 million Ã¢â‚¬" or 21 percent Ã¢â‚¬" of the underwater mortgages nationally.
In those same two states, the share of loans that are current in the GSE portfolio is significantly lower than in the overall GSE portfolio, Fleming explained. Florida and Nevada loans held by the GSEs are current at rates of 85 and 87 percent, respectively, compared to 93 percent of loans that are current when looking at the full GSE portfolio.
Ã¢â‚¬Å“ItÃ¢â‚¬â„¢s not surprising that where insufficient and negative equity is concentrated is also where delinquency levels are higher,Ã¢â‚¬Â Fleming said. Ã¢â‚¬Å“Therefore, the HARP 2.0 requirement that the borrower must be current reduces eligibility in many of the areas where negative equity presents the biggest impediment to refinancing.Ã¢â‚¬Â
Fleming says itÃ¢â‚¬â„¢s certain that many more borrowers will benefit from HARP 2.0 than would have prior to the new[COLUMN_BREAK]
program revisions. But he says it will not be a panacea for the housing market directly, because it doesnÃ¢â‚¬â„¢t address the two biggest downdrafts for housing: distressed borrowers and shadow inventory.
Moving beyond the borrowers themselves, Fleming cites several other Ã¢â‚¬ËœwinnersÃ¢â‚¬â„¢ and Ã¢â‚¬ËœlosersÃ¢â‚¬â„¢ under the new refi effort.
He says HARP 2.0 will be positive for the GSEs themselves because it reduces default risk by reducing the mortgage payment and improving the household balance sheet.
The origination market is another winner in the programÃ¢â‚¬â„¢s refi push. Fleming estimates that HARP 2.0 will lead to an increase of somewhere around 2 million additional transactions, starting in 2012 and going into 2013. With an average loan amount of $175,000, this equates to $350 billion over two years, although Fleming believes it will be frontloaded in 2012.
If as many as 2 million borrowers refinance and reduce their mortgage payments, HARP 2.0 constitutes a significant economic stimulus on the order of several billion dollars given to borrowers in many of the economically hardest hit areas, according to Fleming. Ã¢â‚¬Å“[T]his represents an effective tax cut on the order of a few billion dollars,Ã¢â‚¬Â he said.
Bondholders of high coupon GSE mortgage-backed securities (MBS) fall on the losing side of this plan. Fleming says investors will see prepayment speeds increase significantly. TheyÃ¢â‚¬â„¢ll receive their capital back sooner and will have fewer options for investing it at similar rates, he explains.
For the housing market itself, the impact will likely be Ã¢â‚¬Å“neutral,Ã¢â‚¬Â Fleming says. He explains that refinancing will not significantly reduce the level of negative equity and will be unlikely to effectively reduce strategic default since the program only offers the potential of lower payments but doesnÃ¢â‚¬â„¢t reduce principal.
In addition, Fleming stresses that because borrowers need to be current on existing loans, HARP 2.0 will not reduce the level of the shadow inventory, which, by definition, is composed of seriously delinquent loans and REO held off the market.
Fleming says there is little direct and immediate benefit to the impacted housing markets in the near term or to the borrowers who are already delinquent. Instead, he says, benefits of HARP 2.0 will be longer term in the form of reduced, new distressed assets.
Ã¢â‚¬Å“There are no silver bullets that will solve the issues facing the housing and mortgage markets, only solutions that play their small part,Ã¢â‚¬Â Fleming said. Ã¢â‚¬Å“In the end, the best solution will be a stronger economy and the passing of time.Ã¢â‚¬Â