Mortgage Refinancing: Why Borrowers Aren't Playing HARP

HARP program is being underutilizedIt's not every day that a successful investor takes the national stage to suggest that he should lose billions of dollars for the greater good. But that's what Bill Gross of the bond giant PIMCO did last week at the Treasury and HUD conference on the future of the housing finance system.

Gross unleashed a bold proposal to turn Fannie and Freddie back into one big government agency, which is what they had been until the 1970s. In the meantime, Gross added, they should "quickly re-engineer a refinancing opportunity for all mortgagees that are current on payments" and are part of Fannie or Freddie investment pools.

Gross described this plan as a stimulus program that wouldn't add to the deficit. It would clearly help consumers, by lowering their monthly payments or even reducing principal. Investors in Fannie and Freddie securities, though – including PIMCO and its clients – could stand to take a big financial hit. As Gross told the Huffington Post's Shahien Nasiripour, "I'm here as a public advocate, not as a private [investor]."
Wait a second. Déjà vu here. Isn't the Home Affordable Refinance Program, or HARP, already offering affordable refinancing for Fannie and Freddie mortgages? Well, yes and no. Yes, HARP helps borrowers refinance at low interest rates, even if they owe more than their homes are worth. But a look at the numbers shows that HARP has reached only a handful of those who need help the most.

In the first six months of this year, Freddie Mac refinanced more than 198,000 mortgages under HARP, and Fannie Mae another 100,000. Not bad on the face of it. But now let's dig into who exactly is getting these refis. Few are going to borrowers who would otherwise not be able to refinance. At Freddie Mac, only about 5,700 of the refis, or 1 percent, went to borrowers who owed 105 percent or more of what their homes were worth –- even though, officially, HARP allows refinancing up to 125 percent of a home's value. Another 82,000 owed at least 80 percent. Many of them would likely have been able to refinance anyway, but HARP lets these borrowers reduce the amount of mortgage insurance that they have to buy in order to close the deal.

Fannie doesn't give a breakdown of who is getting its HARP help. But a new report from Amherst Securities Group suggests that Fannie's numbers are no better than Freddie's. Looking at Fannie and Freddie borrowers who took out mortgages between 2006 and 2008 under the very best-case scenario (the borrower has a stellar credit rating and stands to shave more than 1 percent off the interest rate), and who still owed at least 80 percent of their home's value -- only 30 percent went for a HARP refi. It's all downhill from there. Fewer than 15 percent of borrowers with credit scores under 700 refinanced. And only 5 percent of those deep underwater, owing more than 120 percent of the home's value, got a refinance.

Why is HARP strumming so dismally? Amherst offers a long list of reasons, but the most glaring problem is that the help doesn't come for free. Borrowers with low credit scores or high debt loads have to pay an up-front fee, usually between 1 and 2 percent of the loan, because they're considered bigger risks. Right there, that takes away much of the financial benefit of refinancing. And that's on top of roughly $5,200 in other closing costs. Borrowers can pay that up front, or pay it in the form of a higher rate -- but they'll have to pay it. And clearly, very few are.

No wonder borrowers, and investors like Gross, are hungry for a refinance program that delivers a bigger bang. Last month, the internet buzzed with talk of an "August surprise," after a Reuters columnist suggested that Fannie Mae and Freddie Mac were preparing to roll out a massive program to cut the principal owed by millions of mortgage borrowers who owe more than their homes are worth. Alas, that was just a rumor. The one glimmer on the horizon is the new Federal Housing Administration short sale refinance, in which a borrower whose lender is willing to let go of 10 percent of the principal owed can qualify for a new FHA loan. But haven't we learned by now that lenders and investors -- Bill Gross excepted -- are not going to volunteer to lose money?

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