The Powerlessness of HARP's Wealth Redistribution

The Home Affordable Refinancing Program is not giving perks to the right borrower.

A HARP 2.0 expansion may not affect the mortgage marketplace and the economy at large as positively as intended because it is largely about an inefficient transfer of wealth, says Tim Rood, a partner and managing director with The Collingwood Group of Washington.

According to this market insider, the problem is the presumption that “the interest earned by long-term, responsible savers lacks the multiplier effect of money put in the hands of homeowners that are currently paying slightly higher interest rates.”

These insiders see an expanded HARP 2.0 as a way to transfer money from long-term savers to cash strapped homeowners that may boost consumer sentiment and retail sales.

Continued gains have been reported in the previous months. Reports of healthy retail sales correspond to the spring buying season as well as the highest consumer sentiment levels since 2008 when the financial crisis began, analysts wrote. Jobless claims have also decreased in past weeks.

HUD secretary Shaun Donovan is supporting bills introduced by Democratic Sens. Diane Feinstein, Robert Menendez, Barbara Boxer and Jeff Merkley, which include provisions for non-GSEs borrowers to refinance, GSE covered closing costs for refinances, and an elimination of loan-to-value requirements under HARP. Such expansion may “free up more monthly income for American homeowners to spend.” The estimated effect of a HARP 2.0 expansion will be at approximately $250 per consumer, per month.

HARP 2.0 is designed to help improve housing metrics and the overall economy. Yet, mortgage professionals continue to debate the value of HARP improvements.

In an earlier statement chairman and CEO of LendingTree, Doug Lebda, said that while he does not expect the new HARP changes will have “a large impact on the mortgage market as a whole,” program adjustments that allow underwater borrowers to refinance into lower rates and shorter-term loans if they are current on their mortgage payments create opportunity to assist some homeowners and boost consumer confidence.

Currently the economy is experiencing “mild gains,” due to low interest rates, higher affordability and signs of increasing consumer sentiment that may affect the Housing Market Index, these insiders noted in the report, but “the fundamental issues” plaguing new home sales persist.

They highlight that although The National Association of Home Builders/Wells Fargo Housing Market Index—which decreased to 25 in April for the first time in several months to 2007 levels—several metrics, including the HMI, have shown general growth over the past year including the first quarter “has been considerably minimal.”

One of the contributing factors is tight mortgage credit availability that limits the number of eligible buyers. But in their view, an even more important challenge is housing stock. For example, new homes tend to be in less conveniently located locations when compared to existing home inventory. In addition, existing home inventory persistently remains at just under 4 million units. Plus, the shadow inventory is poised to add another 3.5 million units within the next 12-18 months.

Most agree that higher consumer confidence that leads to increases in consumer spending helps speed up the recovery. And it is not a wrong presumption.

“There’s no doubt” it can work, Rood agrees. “It’s just a matter of who ultimately pays for it.” In this case those who will pay for the HARP 2.0 will be the long-term savers, pension funds, retirees and other parties. “It’s a little ironic that right now we still have an overleveraged economy, including overleveraged customers, and we keep talking about responsible financial behavior,” he says, so the perks should go to responsible borrowers. HARP’s problem is that it does not inspire or support “the responsible behavior of long-term savers who have been clipping their coupons and putting money away every month into treasuries or other long-term securities.” Furthermore, their yields are being manipulated by the administration,” he said.

This country does not necessarily have an affordability problem, he says. “We have a demand problem, and over risk, too. Until you start getting at the root of the problem, instead of dealing with treating the symptoms of these issues, I don’t see what success looks like.”

Together, job security, confidence in financial wellbeing and economic certainty can help stimulate housing demand more structurally. Prospective homebuyers, customers in general, suffer from a crisis of confidence. Today’s customers are “unoptimistic they will reach their earning potential and financial stability.”

Rood finds government programs like HARP are necessary even though they cost billions of dollars—because they are designed to help the economic recovery in the long run. He argues, however, that these funds can be effective if used “for some more structural long-term benefits,” such as job creation, or “incentives for the pool of first-time homebuyers that right now are unsatisfied.”

The government appears to struggle with finding an effective balance between borrower incentives and incentives to servicers through loss mitigation, loan management programs and policies Treasury requires them to implement.

Rood argues that some of these funds would be more effective in the long term if used to create incentives for principal reductions through HARP or other program. For example, the government may offer, “some sort of matching” option to borrowers willing to invest to pay down their principal. 

After every loan that could be modified is modified, and every loan that could be refinanced is refinanced, millions will still be stuck with their underwater homes, Rood says. “All of this is a bit of trial and error, but I’d rather have us focus on the root-cause issues,” as opposed to the symptoms of a bigger problem. "It’s essentially a jobs problem and a demand problem.”