Most everyone in the industry knows that refinancings propped up mortgage originations and profits the last few years. Far fewer appreciate the role played by the Home Affordable Refinancing Program.
HARP's contribution to the last refi boom has become clearer as rising interest rates and a dwindling supply of eligible borrowers have eroded the program's volumes along with overall refis. Like the Federal Reserve's bond buying program, which stimulated mortgage lending by lowering long-term rates, HARP is yet another form of government support that has begun to fade.
"The HARP market added a lot of industry volume that otherwise would not have been there," says Anthony Hsieh, CEO of lender loanDepot. The volume was great while it lasted, he says, but some lenders' business plans overlooked its temporary nature (the program is set to expire at the end of next year). That oversight will put additional strain on companies already wrestling with other industry challenges.
HARP was designed to help mostly underwater borrowers whose loans are guaranteed by Fannie Mae or Freddie Mac take advantage of low interest rates. Over the course of its five-year existence, the two iterations of the HARP program have accounted for roughly one-sixth of agency refinance loans, Federal Housing Finance Agency data show. The original version of HARP, created in March 2009, allowed loan-to-value ratios to go only so high, while HARP 2.0, introduced in December 2011, removed the LTV limit and some other restrictions that had been limiting use of the program.
HARP loans accounted for as much as 40% of Fannie Mae and Freddie Mac refis at the program's height in May 2012, when conforming loans and refis dominated the overall market, Black Knight Financial Services estimates.
But in the wake of the Fed's signaling it would taper bond purchases and the resulting rate rise last year, HARP volumes fell. They made up just 23% of agency refis during the fourth quarter, according to the Federal Housing Finance Agency.
Of course, total refinancing volumes have fallen as well. Refis made up just 60% of volume, on average, at the 20 most refi-heavy shops in the fourth quarter, down from almost 77% a year earlier, according to National Mortgage News' Quarterly Data Report.
Ideally, lenders should have planned for refi volume reductions in ways that took into account not only usual the cyclical decline when rates rise but the fact that this program is temporary.
Lenders should realize that HARP "has a sunset in it" and "there's only so much universe [of borrowers] you can HARP," Hsieh says. HARP only permits a single refinance per loan through the program.
One possible reason why some companies failed to account for HARP's disappearance in planning and scaling their operations is that public policy can be unpredictable, as sensitive as some policymakers may be to market disruptions, he says.
HARP refis were relatively profitable for lenders, given that they were easy and cheap to originate. Also, banks and large servicers essentially had a captive audience in their existing borrowers. These borrowers' high loan-to-value ratios limited their refinancing options outside of HARP, and they tended not to be informed enough to shop the limited rate options available from lenders willing to make the loans. While lenders had to cut borrowers' rates when making HARP loans, they had considerable leeway to price them and reject HARP requests because regulators did not want to interfere with lenders' risk management strategies or force them to take on risk.
Some lenders would like to hang onto this source of easy-to-originate loans and still hope for another program extension. Last year, its end-date got pushed out one year to December 2015. Another such reprieve seems unlikely.
"It would be nice, but I heard that that was just not going to happen," says Al Crisanty, vice president of national wholesale production for 360 Mortgage Group.
Even if HARP were extended, with rates still higher, borrower burnout continuing and overall refis dwindling, there may not be much volume left in the program by the time it ends.
"I think by 2015, the number of loans will be small and the program will have been enough of a success," says Laurie Goodman, director of the Urban Institute's Housing Finance Policy Center. "So far, there is no reason to extend."
There are still some untapped HARP candidates left, says Frank Pallotta, CEO and owner of the advisory firm Steel Curtain Capital Group LLC, Ramsey, N.J., who previously worked for a firm that helped lenders reach struggling borrowers. Those with the highest loan-to-value ratios in particular may require more aggressive education and communication efforts than the typical direct mailings lenders tend to use to court HARP prospects, he says. In January, HARP-eligible refis were still running at about 23% of agency refis overall, according to Black Knight.
The lowest percentage of HARP-eligible refis was at the program's outset during its first iteration in March 2009, when they made up about 4% of agency refis, according to Black Knight. HARP-eligible loans' agency refi percentages failed to top 23% until after HARP 2.0 went into effect in December 2011, the Black Knight data show.