Fiddling With HARP Won't Save Ailing Homeowners
President Obama's new and improved Home Affordable Refinance Program is a step in the right direction -- meaning likely to leave millions of American homeowners mired in debt. In other words, minor course corrections are inadequate given the major housing crisis.
HARP was launched in 2009 to help people whose homes are worth less than what they owe on their government-insured mortgage. Like other federal initiatives aimed at shoring up the residential real estate market, notably the ineffectual Home Affordable Modification Program, HARP has fallen far short of expectations both as a way to forestall foreclosures and to speed the economic recovery. The biggest problem is that it hasn't helped the neediest homeowners. Of the nearly 900,000 borrowers who have participated in the program, only 70,000 of these folks were actually "underwater" on their properties.
Why? Because by design HARP was limited to people who were only moderately underwater. Lenders leery of making risky loans that they might have to repurchase later also cherry-picked more creditworthy borrowers to refinance through the program. And while HARP did offer lower interest rates, participants were required to pay fees that largely negated the benefits of refinancing. As economists like to say, the incentives were poor.
The revised HARP aims to remedy those flaws. Homeowners who are deeper underwater will be eligible to refinance under the program. Certain fees are being eliminated. Banks will have greater legal protections in case a refinanced mortgage sours, which in principle should reduce lending risks. Gene Sperling, one of Obama's top economic advisers, said he expects such enhancements to "unleash competition" among lenders for refi business.
At least some smart economists agree. Joe Gagnon of the Peterson Institute for International Economics cites data estimating that broadening HARP could result in $428 billion in additional refis, saving borrowers a total of $7.4 billion a year. That's not massive, but it's not peanuts, either, amounting to 0.5 percent of GDP. The government says HARP could save individual homeowners at least $2,500 a year. The program is also more effective than a temporary tax cut in boosting household spending because the savings accrue over a long period of time, Gagnon says.
Despite those modest macroeconomic benefits, Felix Salmon nails why HARP isn't a game-changer for homeowners in need of immediate financial help:
Most importantly, it doesn't do principal reductions -- if you're underwater when you get your HARP refinance, you'll be underwater afterwards, too. The [Federal Housing Finance Agency, which oversees Fannie/Freddie] itself, in its press release, helpfully points out that for someone with a loan worth 25 percent more than their house, they won't start building equity in their home for ten years if they refinance into a 30-year fixed-rate mortgage.As Salmon suggests, the best thing the Obama administration could for borrowers who have seen the equity whoosh out of their homes is -- prepare to be shocked -- reduce their mortgage balance. There's also an economically and legally straightforward, if politically treacherous, way to do that -- allow bankruptcy courts to reduce mortgage principal. Of course, such "cram-downs" are anathema to big banks and mortgage investors, which would have to swallow large losses on the reduced value of the loans.
As a result, the White House in 2009 backed away from Obama's initial support for cram-down legislation. The American Prospect's Robert Kuttner offers a plausible theory to explain that timidity:
Why does the Administration keep resorting to do-overs when it comes to mortgage relief? It all boils down to one thing. Tim Geithner's Treasury Department keeps giving priority to helping banks.
If banks and other bondholders had to write down the value of mortgages, either whole loans or securitized loans, to their actual market value, banks and other investors would take a large hit. Geithner's effort to prop up banks by disguising the true weakness of their balance sheets would take an even bigger hit.Tweaking HARP to enable more people to refinance into cheaper mortgages is a good idea. But given the scale of this country's housing woes, such measures amount to firing spitwads at a tank. Nearly 6 million Americans have lost their homes, while another 3.5 million face foreclosure. The economy remains inert. Homeowners need a blood transfusion, not a band-aid.
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