CoreLogic: HARP 2.0 Winners and Losers

Saying that there are no silverrnbullets that will solve all the problems facing the housing and mortgagernmarkets CoreLogic, arnprovider of information, analytics and business services has picked winners and losers of what is being called “HARP2.0”.  The Home Affordable Refinance Programrn(HARP) began in 2009 to assist borrowers who are current in their mortgagesrnbut underwater relative to the value of their home.  On October 24 the administration announcedrnsignificant changes to the program to make it available to borrowers beyond thernestimated 900,000 who had participated. </p

The changes eliminate the prevailingrn125 percent maximum loan-to-value (LTV) ratio for new HARP mortgages, reducernrisk-based fees for borrowers and grant representation and warranty relief to makernthe program more palatable to lenders.  Therernare also changes to facilitate appraisals and subordination of junior liens andrnthe program is extended until the end of 2013. rn However, the program is only availablernto borrowers with mortgages sold to Freddie Mac or Fannie Mae (the GSEs) priorrnto the end of May 2009.</p

The CoreLogic report says that timernwill reveal the true impacts of the changes but it is certain that many morernborrowers will benefit than would have otherwise, as will the housing marketsrnand local economies that are hardest hit by the housing crisis.</p

CoreLogic and its chief economistrnMark Fleming estimate that there are more than 20 million borrowers with insufficientrnor negative equity in their homes which is preventing them from takingrnadvantage of current low rates and thus causing a deterrent to consumption andrnimprovement of household balance sheets. rnAn estimated 4.7 million of these homeowners are underwater by 25rnpercent or more and are disproportionately located in Nevada and Florida which togetherrnaccount for 21 percent of all underwater mortgages nationally.  While 93 percent of the GSE portfolio isrnperforming, the Nevada and Florida mortgages in that portfolio are performingrnat 85 and 87 percent respectively. </p

The company said that while HARP 2.0’srnprimary benefit, increased refinancing of insufficient and negative equityrnborrowers, doesn’t addresses the two biggest problems facing the housing market;rndistressed borrowers and shadow inventory, there are still key benefits thatrnshould be expected for the various constituencies:</p

The GSE’s:  The ability forrnborrowers to refinance at a lower rate should reduce the default risk for thernGSE’s by reducing the mortgage payment and increasing available householdrnfunds.</p

Mortgage Origination Market:  CoreLogic agreesrnwith the general consensus that the changes should lead to an increase ofrnsomewhere around 2 million new mortgages in 2012 and 2013.  Assuming an average loan of $175,000 thisrnwould be $350 billion over two years, however, the number could be negativelyrnaffected by a rise in rates</p

The Broad Economy:  If the estimates ofrnrefinancing hold, HARP2.0 could provide an economic stimulus of several billionrndollars feeding into some of the nations hardest hit areas.  While some of this money will be saved andrnsome used to pay down debt, it could have the same impact as a few billionrndollar tax cut. </p

The benefits are less clear or arernmixed for two other constituencies.</p

GSE Bondholders:  The changes arernlikely to enhance the attractiveness of refinancing so that investors willrnreceive their capital back sooner with few options for investing it at similarrnrates.  In the future the opposite shouldrnoccur and prepayment speeds will be reduced because so many loans will bernlocked into historically low rates</p

Housing Market:  Because the program does not reduce principal it will notrnsignificantly reduce the level of insufficient and negative equity and will bernunlikely to effectively reduce strategic defaults; nor will it reduce shadowrninventory as homeowners must be current on loans to participate.  Any likely benefit will be in the form ofrnlower future shadow inventory due to reduced future delinquency risk.

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