Two Democratic senators, Sen. Robert Menendez of New Jersey and Sen. Barbara Boxer of California, have reintroduced legislation that would create a new, expanded version of HARP, or the Home Affordable Refinance Program, called “HARP 3.0.”
The original HARP, and its expanded successor HARP 2.0, helped fuel the refinancing boom that propped up the mortgage and real estate markets since the dark days of 2009. Well, that and some heavy money creation at the Federal Reserve and rock-bottom interest rates that held conforming mortgages below 4 percent all through 2012.
The new HARP bill, S.249, is essentially a repeat of the same bill introduced last year, which failed to gain any traction in Congress. HARP 3.0 would expand the streamlined refinancing program to include any GSE-backed loan, eliminate the programs’ restrictions on loan-to-value ratios, and prevent the GSEs from charging a fee to take on a loan they already guarantee.
Industry Support for HARP 3.0
The bill has garnered the support of a number of key real estate-related trade groups, including the Mortgage Bankers Association, the National Association of Home Builders, the National Association of Mortgage Brokers, the National Association of Realtors®, the National Association of Real Estate Brokers, and the Center for Responsible Lending.
HARP 3.0′s Major Provisions
Unless Congress acts, HARP, as written, is set to expire on Dec. 31, 2013. The RHRA would extend the program for a year.
According to the bill’s supporters, the new bill would make it easier for more lenders to compete for HARP refinancing business – driving down loan costs in the process. Amherst Securities Group found that HARP borrowers typically pay a point more than people with non-HARP loans, according to Boxer’s office. Amherst also found that banks had been charging borrowers who had refinanced loans they already had with that bank – so-called “captive” borrowers – some .53 points more than they charged other borrowers.
The bill also moves to eliminate a curious perverse incentive that was built into previous versions of the HARP program: Those who had paid down their balances or had built 20 percent equity or better in their homes were in effect locked out of the best deals in the HARP program. Originally, HARP locked these borrowers out altogether. The Federal Housing Authority loosened the rules and lowered fees – but only for people with less than 20 percent equity. This meant that the most responsible borrowers – the ones who had been paying down their balances, improving their properties and building equity – were forced to pay much higher fees than the more profligate borrowers – by as much as 2 percent. That means a difference of $4,000 for a typical $200,000 refinance.
The new bill seeks to level the playing field so that those with higher levels of equity are not penalized for their prudence.
A Couple of Weird Things About HARP 3.0
Curiously, even as the Consumer Financial Protection Bureau releases regulations requiring lenders to verify employment and income for newly originated loans, this bill would go the opposite direction for refinances. Specifically, the bill would eliminate the requirement for the borrower to prove income or employment. According to Senator Boxer’s office, eliminating the requirement will result in HARP “streamlining the refinancing process and removing unnecessary costs and hassle for lenders and borrowers alike.”
Whether the process of verifying income and employment before allowing hundreds of thousands of dollars to change hands, following the hard experience of the last six years, is a necessary and prudent practice, is left as an exercise for the reader.
The new bill also seeks to streamline the appraisal process. Currently, the GSEs use computer technology to define estimated valuations without having to involve an in-person appraisal. But this only works well in neighborhoods with a lot of comps to look at. Under the current rules, the GSEs frequently require an on-site appraisal for homes in rural areas or areas where there are few comps to form a reliable appraisal using an automated valuation model.
The bill seeks to force GSEs to use automated valuation models even where there are few comps to form a valid comparison. The plus, of course, is that the homeowner can save hundreds of dollars in appraisal costs. The minus, of course, is that no matter how hard Sens. Menendez and Boxer try, they cannot wish away the basic rules of statistics: You cannot form an accurate appraisal model in a dynamic market without a sufficient number of recent and local sales to form a valid comparison.
This Ain’t Free Money
On the surface, easy refinancing on better terms seems like a sweet deal to homeowners. But it comes at a cost to everyone else. The Congressional Research Service notes that publicly owned mutual funds, which own 18.5 percent of mortgage-backed securities, would suffer because of reduced investment income – a phenomenon called “reinvestment risk.”
Current Status and Outlook
The proposed bill is now in the Senate Committee on Banking, Housing and Urban Affairs – the first step in the legislative process. It has picked up a number of co-sponsors, in addition to the early backing of Boxer and Menendez.
Because the bill is popular among mainstream real estate industry, construction groups and liberal groups alike (it’s backed by the Center for American Progress), and because the program is popular among homeowners nationwide, it has a very good chance of emerging from the Democrat-controlled committee.