The Obama administration has tried to light the fuse that will ignite a new refinance boom for underwater borrowers. But investors’ caution threatens to make this second-go round for the Home Affordable Refinance Program (HARP) another damp squib.
Launched in 2009, HARP was intended to allow the millions of homeowners nationwide whose homes are underwater, or near it, to refinance at today’s low rates. Proponents at the time argued it represented one of the best chances to goose the economy – by putting a couple more bucks a month in homeowner’s pockets – without causing too much pain or requiring Congress to pass another spending bill.
But so far the effort has fizzled, with few refinancings happening under the program – so few, in fact, that last month the Obama administration prodded Fannie and Freddie into loosening the program’s guidelines even further.
The GSEs now allow refinancings of more than 125 percent of the house’s current value and mandate that subject properties be evaluated using their own automated valuation models (AVM) instead of individual appraisals. The latter move is aimed at both speeding up loan processing and assuring lenders that the responsibility for deciding the property’s current worth will fall on the GSEs.
The second round of HARP officially began this month. But it’s been slow to get off the ground.
No Takers
Many independent lenders and brokers are unable to take part until Fannie re-works Desktop Underwriter, the AVM system they use to screen applications. That isn’t expected to happen until March of next year.
And even the bigger lenders, approved to sell loans directly to Fannie and Freddie, aren’t finding many takers.
“We can’t find any of our investors that are buying it,” said Jerami Marshal, chief operating officer of Reliant Mortgage Company in Beverly. “We’re approved with the big eight, but we’re just not finding anybody that wants to go up to that loan-to-value.”
The concerns are the same as in the first round of HARP, lenders and brokers say, and can be summed up in three words that spell doom to lenders’ ears: Reps, warranties, and buybacks.
“Representations and warranties” are the specific contractual promises lenders make about the quality of the loans they’re selling to Fannie and Freddie. Break those promises, and the GSEs can force the original lender to buy back the loan, sticking them with a non-performing albatross.
Fannie and Freddie have been diligently – some lenders would say relentlessly – pushing buybacks for loans underwritten during the boom which the GSEs say didn’t meet their guidelines. Lenders have resisted, with several court battles involving the big banks currently pending.
Regardless of the outcome in the courtroom, however, lenders are being hyper-vigilant about defending themselves against possible future buybacks. That means even with Fannie and Freddie loosening their own rules, lenders are often applying their own, stricter, “overlays” to the guidelines.
“That’s my fear, that investors will put overlays,” said Geof McLaughlin, a broker with Mortgage Master of Walpole. “This last go-round, [Fannie and Freddie] went up to 125 percent, but [overlays] restricted us, unless you were the servicer, to 105 percent.”
HARP II appears to be headed in the same direction.
‘A Lot Of Uncertainty’
“We have asked and have not gotten any specific advice on how to implement it,” said Paul Gershkowitz, president of Greenpark Mortgage Corp. in Needham. And it’s not that there hasn’t been interest from borrowers. “We’ve heard from numerous consumers” already, said Gershkowitz, and “if we can offer it, we’d love to do it.”
But lenders’ fear of buybacks could mean that unless the loan is already being serviced by their firm, they’d be unwilling to refinance, since they’d now be bearing the risks of a loan already underwater and therefore in the danger zone for default.
“Why would Wells want to start servicing a loan that Chase has been servicing if it’s dramatically underwater?” Gershkowitz asked. “Unless [investors are] comfortable that their reps and warranties are being waived, their incentive would probably be to only do it on loans that they’re [already] servicing, and if that’s the case it might not even roll down to the correspondent channel.”
The possibility that a high LTV loan might go into default or trigger a buyback isn’t the only thing worrying banks either, Marshal said. Loans refinanced under HARP II may or may not meet the yet-to-be-finalized definition of a “qualified residential mortgage,” as laid out in the Dodd-Frank financial reform bill. If they don’t, banks may have to retain reserves against them.
“There’s just a lot of uncertainty,” he said.
It all adds up to another big splashy government program – which could end up having only a shallow ripple effect on consumers.
“It’s really unfortunate, because I hear these ads on the radio, ‘Get in line! Apply now! Start today!’” said Amy Tierce of Fairway Independent Mortgage Corp. in Needham. But, she said, “At the moment, nobody’s really sure if it’s going to have any effect on the consumer at all.”
