HARP is the buzz word of the day. It stands for Home Affordable Refinance Program. I’ve been talking about this for the last few months as a possibility and today it will become reality. President Obama will announce his new HARP refinance program that is geared to help homeowner’s who are underwater and are current on their payments. We are finally getting a program that will help those who’ve been responsible and made their payments on time, right? Not so fast.
This program is a modification of the HARP program from two years ago. When the HARP program was first introduced it was supposed to help around 10 million homeowner’s who were underwater up to 125% of their current loan balance. After two years the program has helped less than 1 million. That’s less than 10% of the people it was intended to help. That’s what I call disastrously unsuccessful.
The new HARP refinance program is intended to help homeowners who are current on their payments and underwater just like the first HARP program two years ago. The difference is there is no limit on how underwater your home is. So you could have a loan balance of 500,000 and our home may only be worth $250,000. Under the new Home Affordable Refinance Program you will be able to qualify for today’s low rates.
The problem with HARP is that it needs banks to participate in the program in order for it to work. If a bank does participate they are taking on more risk than if they leave the loan as is because of buy backs and downgrades in asset quality. Why would an already struggling banking industry take on more risk? The answer is they won’t and that’s why the program was unsuccessful for the last two years and will likely be unsuccessful now.
If the Fed and Obama want it to be successful there must be provisions to reduce risk for the banking institutions the need participation from in order to be successful. The need to remove the buy back provisions from Fannie Mae and Freddie Mac if the loan fails after refinancing. They also need to change the rule that will make other agencies downgrade the assets quality of a bank’s portfolio which will increase their systemic risk.
Just increasing the 125% loan to value maximum to unlimited will not be enough for success. A lot more has to happen and many government agencies have to come together for this to work which will be a miracle in its own. We will see when the details are released later today. I am skeptical as I believe this to be more political than anything. What’s your opinion? Do you think the government is doing enough to help stimulate the economy? Are they doing too much?