Time for HARP to Embrace Underwater Private Label Borrowers?

Recent data suggest legislators may have to start considering the pros and cons of expanding the Home Affordable Refinance Program so it includes private-label loans.

HARP incentives for lenders worked well for over one million so called “underwater” borrowers who refinanced into lower interest rate loans in 2012.

During the same period, 540,000 private-label borrowers who are ineligible for HARP received a modification raising the inevitable question: Is it time to make HARP more inclusive to these borrowers?

According to Fitch Ratings, new Federal Housing Finance Agency data show last year’s revisions of HARP, including the removal of a 125% loan-to-value maximum and a reduced liability for lenders of the loans, have served their purpose.

But while refinancing activity increased significantly after FHFA implemented these revisions, analysts said, HARP is limited to borrowers with loans guaranteed by Fannie Mae and Freddie Mac, leaving underwater borrowers in private-label securitized mortgage loans “with fewer refinancing options.”

According to Fitch, approximately 45% of all underwater private-label borrowers have received a loan modification, making modifications “the most common form of payment assistance” for this category of underwater borrowers.

In 2012 the combined effect of modifications, distressed loan liquidations, and home price gains the number of underwater loans in private-label RMBS pools decreased 25% from 2.04 million to 1.5 million.

“The surprisingly strong gains in home prices over the past year,” analysts wrote in a recent report, benefited a large number of underwater borrowers.

The Case-Shiller home price index reported a 9% annual increase nationally in 2012 with double-digit gains in some of the most problematic markets in California, Nevada, and Arizona, which coincides with Corelogic estimates of home price gains that have reduced the total number of agency and private-label borrowers with negative equity by over one million.

Despite the improvements, analysts warn, “negative equity remains a significant credit risk in private-label RMBS” since approximately one-third of all outstanding borrowers in private-label RMBS pools remain underwater.

Additionally, Fitch projects “some regions of the U.S., particularly in the Northeast, may experience further home price declines before reaching a sustainable level.”

The U.S. Department of Treasury recently approved a small pilot program in Oregon that would allow private-label loans to refinance through a program similar to HARP, analysts note.

“However, due to congressional resistance, an expansion of HARP to include private-label loans does not seem near at this point.”