Why HAMP and HARP Have Run Their Course

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The Obama administration's Making Home Affordable program has been extended and expanded so many times that it's gotten hard to imagine life without it. But the days may be numbered for MHA and its two primary initiatives, the Home Affordable Modification Program and Home Affordable Refinance Program.

As the housing market's recovery continues to solidify, the number of underwater borrowers that MHA was designed to help has receded, not to mention the fact that a new administration will occupy the White House following the upcoming elections.

In one sense, the scheduled Dec. 31 end date of Making Home Affordable is a nonevent because nationally, the volume of loans flowing through HAMP and HARP has slowed considerably. But the programs are still a force to be reckoned with. The refinance program's volume has been significant in the past and remains so in certain regions. And there's no denying that the modification program, while small in size now, has had a huge influence over the way loss mitigation is handled in the market.

"MHA has left a lasting impact on the industry," said Mark McArdle, deputy assistant secretary of the Treasury Department's Office of Financial Stability. "Previously, modifications were typically about kicking the can down the road and ultimately did not reduce payments. HAMP has introduced a standardized loss mitigation waterfall as a common expectation. The question is, when we go away, how much of that will remain?"

The Federal Housing Finance Agency is weighing options for a refinance program to succeed HARP, but any plan would be limited to loans purchased by its primary charges, Fannie Mae and Freddie Mac. And it's so far been silent on any plans for a new modification program to take HAMP's place.

But HAMP's influence will continue long after servicers stop taking requests for new workouts. The runoff of previously modified loans will last for years, while other forms of loss mitigation will continue to incorporate procedures that were rare, or even nonexistent, prior to its existence — not to mention how history will view Making Home Affordable's legacy in the broader context of the Great Recession.

"What the expiration of this means will be a matter of how you view economics," said Les Parker, an industry veteran and contributing writer to The Mortgage Professional's Handbook, a guidebook on the inner-workings and history of the mortgage industry published earlier this year. "It is government intervention, and the questions people will look at is, was that government intervention good or bad?"

With that in mind, let's take a look at what the mortgage industry might look like once HAMP and HARP have come to an end.

A Political Question

Both Republican and Democratic presidents have shown a willingness to let government intervene in the mortgage markets in the past. It's unclear where the current slate of presidential candidates stand on the issue, but generally, Parker said, "I think the odds are Making Home Affordable is not going to be extended if a Republican is coming in."

Some Republicans and investors, as well as the special inspector general for the Troubled Asset Relief Program that funds MHA, have been critical of HAMP's redefault rate or the program's inability to reach more borrowers. Critics also have showed concern about the potential moral hazard it presents in lowering delinquent borrowers payments in standardized ways that don't account more granularly for individuals' merits, while leaving performing borrowers' unchanged, Parker noted.

Certain Democrats as well as the Treasury, the FHFA and other proponents have meanwhile defended the program. They note that the majority of HAMP loans remain current after modification, that the program was structured to minimize moral hazard and that performance improved over time, with the latest iterations proving generally more effective than proprietary modifications.

That debate will resurface in any contemplation of an extension or successor program to HAMP. But because the next president will take office shortly after MHA's scheduled expiration, it's unlikely there will be any change from the current plan to let it sunset, unless it is a simple extension. However, an extension remains a long shot because of the widespread perception that the program was created to respond to a crisis that no longer exists.

"I think it will sunset because how do you justify that there is still a problem?" Parker said.

Ultimately, HAMP could become the model for what some are calling a "mod on a shelf," which could be revived in the event of a future housing crisis, said Eric Selk, the executive director of Hope Now.

"HAMP was developed to address a crisis and we're really not in a crisis," he said.

While the end of Making Home Affordable may serve as fodder for political rhetoric in debates about housing policy, market conditions are generally far better than they were during the crisis, said David Lykken, president and founder of Transformational Mortgage Solutions, a consulting firm in Austin, Texas.

"It's important to realize as we go into this election cycle that there could be a lot of talk about how the end of Making Home Affordable could destroy homeownership to suggest that we need the programs," he said.

But delinquencies have returned to normalized levels, noted Lynn Fisher, a vice president of research and economics at the Mortgage Bankers Association. And even though negative equity levels aren't back to normal, they are far closer to it.

The percentage of underwater homes among people with a mortgage is less than 10%, as opposed to a rate more than twice that during the crisis, according to CoreLogic chief economist Frank Nothaft.

"You would normally expect to see negative equity closer to 2% to 3%. We're at most two to three years from normality," Nothaft said.

Overall, the number of underwater homeowners with a GSE loan has dropped by more than 80% since its peak at the end of 2011, and the vast majority of the remaining underwater borrowers are current on their mortgages, according to FHFA Director Mel Watt. About 9% are still seriously delinquent.

While borrower distress associated with crisis-era underwater homes is less of a problem on average, it remains a challenge in certain concentrated regions. So the expiration of a modification program specifically designed to help these borrowers will put some stress on these regions and entities that hold concentrations of loans there.

States with longer foreclosure timelines such as New York, New Jersey and Florida are more likely to feel some impact from HAMP's expiration, said Michael Fratantoni, the MBA's chief economist.

And some regions that still lag in home price recovery will be affected more than others when MHA's refinance program ends. These include Las Vegas, the Inland Empire in California, and parts of Florida, Fratantoni added.

HARP Will Be Replaced

While it was less groundbreaking than HAMP and received the benefit of a number of refinements over time, the Home Affordable Refinance Program didn't have as tough of a row to hoe.

"HARP was an amazingly successful program," said Fratantoni. "I think HAMP had some more hurdles to get over."

And unlike HAMP, there are immediate plans for a GSE successor to HARP.

"As HARP winds down, we are also working to make sure that borrowers with high loan-to-value ratio loans have a refinance option in the future," Watt said in in a policy speech in March, noting that it "will be important in the event there are regional or localized economic disruptions that lead to negative equity." However, borrowers who previously participated in HARP would not be eligible to refinance under the new program.

The GSEs have helped more than 3.3 million homeowners refinance their mortgages through HARP, saving them on average $2,200 a year in reduced mortgage payments.

HARP loans accounted for as much as 40% of Fannie Mae and Freddie Mac refinance volume at the program's height in May 2012, according to Black Knight Financial Services estimates. However, that was an unusual month, and the percentage has fallen drastically over time. While it continues to aggressively target remaining eligible borrowers, the FHFA found HARP accounted for only about 5% of GSE refinances during January 2016 and quarterly averages were no higher than around 27% at the market's peak.

So what kind of program could succeed HARP at Fannie and Freddie?

One possibility is a Fannie Mae loan modeled off of the Department of Veterans Affairs' streamline refinance program, said Brent Nyitray, director of capital markets at iServe Residential Lending in Stamford, Conn.

"That's one thing the government could easily do if they wanted to permanently extend HARP," he said.

Among other things, the Department of Veterans Affairs does not require an appraisal on its streamline refinances, which would help underwater borrowers overcome any loan-to-value eligibility restrictions.

"The question will be will lenders want to do that? Because there are fears of having the loan put back to you by Fannie Mae," Nyitray said.

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Servicing Compliance Loss mitigation Mortgage defaults Foreclosures Secondary market