Six Steps That Could Boost Refinancing

By Nick Timiraos

Associated Press

The Obama administration and the Federal Reserve are looking for ways to help more homeowners refinance.

Mortgage rates have dropped—again—to their lowest levels in the last 50 years. A Freddie Mac survey showed that 30-year fixed-rate mortgages averaged 4.12% this week, down from 4.22% last week.

But demand for new loans or refinancing remains muted, underscoring reasons why policy makers at the White House and Federal Reserve are thinking about new ways to help more homeowners refinance.

In Tuesday’s Outlook column, we looked at one of the great puzzles of the government’s initial response to the housing crisis: why few underwater borrowers have refinanced their loans through a White House program that was launched more than two years ago.

The Home Affordable Refinance Program allows underwater borrowers whose loans are backed by Fannie and Freddie to refinance. Under HARP, borrowers with loans worth 80% to 125% of the value of their house can refinance without putting down more cash or taking out mortgage insurance—those steps are often so costly that it no longer makes sense to refinance.

While 838,000 loans had refinanced under the program through June, fewer than 63,000 mortgages with loan-to-value ratios between 105% and 125% had refinanced. Fannie and Freddie guarantee millions of loans that are underwater.

The White House could take a number of steps to revamp the program, though many of these steps would require the blessing of Fannie and Freddie’s regulator, the Federal Housing Finance Agency. Here are six that policy makers would be likely to consider:

• Remove the eligibility date. Currently, loans that were originated after June 2009 aren’t eligible for HARP, and loans that have already refinanced once through HARP can’t be refinanced again.
• Eliminate the 125% loan-to-value cap. Nearly one in 13 loans backed by Fannie Mae can’t participate in the HARP program because they’re too far underwater. These loans weren’t eligible initially for HARP because they can’t be sold into standard pools of mortgage-backed securities issued by Fannie and Freddie. Some analysts have suggested that the Federal Reserve could buy these loans as one way to facilitate the program.
• Waive risk-based fees that Fannie and Freddie charge. The firms charge lenders extra fees for riskier borrowers, which effectively raises the rate and reduces the incentive for underwater borrowers to refinance. “It wouldn’t be just a refinance boom for the pristine credits. It would open it up for middle America as well,” says Bob Walters, chief economist at Quicken Loans.
• Streamline the application process to tamp down closing costs. Eliminating appraisals, waiving title insurance requirements, and simplifying the refinance process could reduce fees that may have discouraged underwater borrowers from refinancing. (There’s much more on this in a paper by mortgage-market consultant Alan Boyce and Columbia Business School economists Glenn Hubbard and Christopher Mayer.)
• Address second mortgages and mortgage insurance. Using the HARP program for borrowers who are underwater has proven “extraordinarily difficult,” says Mr. Walters, because many borrowers have second mortgages or mortgage insurance from companies that must sign off on the new loan. Coming up with a way to gain automatic pre-approval from participating second-lien holders and mortgage insurers could accelerate underwater refinancing.
• Indemnify lenders against the potential for “put-backs.” This is a big one. Many banks have been reluctant to refinance borrowers under HARP, or are charging hefty fees, because of the concern that they’ll have to buy back the loan from Fannie and Freddie if it defaults.

Of course, any uptick in refinancing would come at the expense of bondholders, muting some of the economic boost. A working paper from the Congressional Budget Office provided some estimates around the benefits and costs of refinancing more borrowers.

Fixing one or two of these steps would help at the margins. Dealing with all of them would provide a bigger boost to refinancing. And all of them stop short of the “blanket refinance” that some analysts have proposed, where Fannie and Freddie would automatically refinance borrowers with an above-market rate, whether they ask for it or not.

“Mass refinance” programs aren’t as likely to happen because they threaten to create significant uncertainty for mortgage-bond investors. Officials may be reluctant to take steps that reward yesterday’s borrowers at the expense of tomorrow’s.

Follow Nick on Twitter: @NickTimiraos

Original Post: http://blogs.wsj.com/developments/2011/09/08/six-steps-that-could-boost-refinancing/