Underwater homeowners need better access to government-sponsored refinancing programs. This is the view held by some members of Congress, who recently pressed the nation’s top housing agency for more aggressive action.
The Federal Housing Finance Agency (FHFA) needs to make mortgage refinancing available to more homeowners — and fast. House Democrats have complained that the federal agency is not moving quickly enough to “tweak” certain rules pertaining to its mortgage refinance program.
The strongest language came from Representative Dennis Cardoza, a Democrat from California, who said that the FHFA should either “act or get out of the way.” The lawmakers are frustrated over what they feel is sluggishness on the FHFA’s part, with regard to mortgage refinancing laws. At the root of the issue is HARP, the federal government’s Home Affordable Refinance Program.
HARP: Government Refinancing Program Born from the Bust
The Home Affordable Refinance Program (HARP) is part of the government’s Making Home Affordable Program, both of which were launched in the wake of the housing crash of 2008.
The short-term goal of HARP is to make mortgage refinancing available to a wider segment of homeowners. The long-term goal of the program is to reduce the number of defaults and foreclosures — a problem that still plagues the U.S. housing market.
Under this government refinance program, homeowners who don’t have enough to equity to qualify for a traditional refinance loan can refi into a lower monthly payment. And those with high-risk ARM loans can transition to the long-term predictability of a fixed-rate loan. Specifically, the program is designed for homeowners who are current on their mortgage payments, but unable to refinance due to insufficient equity (including those who are slightly underwater in their loans).
Government refinancing assistance has always been controversial. Critics claim that the government should reduce its role in the housing market, instead of broadening its role. These opponents claim that artificial stimulation from government programs is partly to blame for the housing crisis. Many supporters of the program criticize the way it has been managed, saying it hasn’t gone far enough to allow refinancing for underwater homeowners who are struggling to keep up with their payments.
Democrats Want Broader Access to Program
On Thursday, seven lawmakers met with officials from the FHFA to discuss the HARP program in particular, and government refinancing support in general. The group feels that the FHFA is not moving quickly enough to make HARP-based refinance loans available to a larger audience. That kind of sluggishness, said the lawmakers, will cause more harm to an already struggling housing market.
Rep. Elijah Cummings (D-Md.) initiated the meeting between the lawmakers and FHFA officials. Dozens of other House representatives agreed that a discussion was needed about the government’s role in refinancing. Unfortunately, the meeting was less than productive. “We were not able to get the kind of answers we want,” said Cummings.
Most agree that HARP needs to be improved. The problems with the government refinance program are manifold. Lenders are reluctant to make loans to people with negative equity — the very segment that the HARP program is designed to serve. So the government offers incentives to lenders to participate. But in many cases, private mortgage insurance (PMI) is required on the loans. This is usually the case when the loan-to-value (LTV) ratio is above 80 percent. But the PMI companies, who took huge losses during the housing bust, often refuse to insure these types of loans.
Low Mortgage Rates Available, But Out of Reach
On Thursday, Freddie Mac announced that mortgage rates fell to another record low. According to their weekly survey of the mortgage market, the average rate for a 30-year fixed-rate loan was 4.09 percent (for the week of September 15, 2011). This is certainly enticing to homeowners. But many of them cannot refinance into such a low rate because they are underwater in their loans — they owe more on the mortgage than their homes are worth.
Many of these underwater homeowners will always be underwater. It’s unlikely that their homes will ever reach the peak price levels seen during the housing bubble. People in this situation see only three options — sell, refinance, or walk away and let the bank foreclose.
- Selling is difficult, because underwater homeowners won’t be able to pay off their existing mortgage balances (without dipping into their own pockets).
- Many in this situation choose to walk away from their homes, and accept the damage to their credit scores resulting from foreclosure. This fattens a foreclosure pipeline that is already bursting at the seams.
- So mortgage refinancing is often viewed as the only viable solution. But even that option is hard to come by, for the reasons mentioned above.
It’s a pickle, and it threatens to depress our housing market for a long time. That is why some lawmakers are working to broaden the government refinancing program, to make it more efficient and accessible.
When President Obama unveiled his $447 billion jobs package recently, he mentioned that the refinancing situation was on his radar. “We’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent,” the president said.
But this might be one problem the president cannot fix.