The government's Home Affordable Refinancing Program has a major flaw, according to one industry veteran -- it doesn't give borrowers a financial incentive to stay in the home.
Barry Habib, chief market strategist at Residential Finance Corp., who's best known in the industry as a mortgage trainer, says a HARP refinancing can significantly lower a borrower's monthly payment, but the total might be higher than the cost of renting or buying a similar home down the block.
After refinancing a $220,000 mortgage to a lower rate, the borrower still has a $220,000 mortgage and no equity. That makes them a candidate for strategic default, he predicted.
"They will wake up after six or eight years and realize they are not building equity," Habib said in an interview. He joined the Columbus, Ohio-based RFC in January.
To build equity, Habib has devised an alternative to HARP that also assists underwater borrowers that are current on their mortgage. His plan splits the existing mortgage into two parts -- a first mortgage with a 80% LTV and a second mortgage for the remaining balance.
The borrower gets a 20-year fixed mortgage to quickly build equity and makes no payments on the second mortgage. The second mortgage is securitized and held by the Federal Reserve Board. It accrues interest until the borrower sells the property or voluntarily pays it off.
Habib estimates his plan would add $100 billion to $150 billion in MBS to the Federal Reserve's balance sheet. Uncle Sam would be on the hook for any losses -- which would be minimal considering the benefits, according to the mortgage market expert.
"Even in a draconian situation," actual losses would only be $10 billion to $15 billion, he said. It would cost less than the "cash for clunkers" program or the homebuyer's tax credit.
“This program would enable an average homeowner to save about $590 a month on their mortgage payment," Habib said. The borrower can spend it, save it, or pay down the mortgage quicker. At the same time, it will stimulate the economy, reduce foreclosures and aid banks with large mortgage portfolios.
