Homeowners with underwater mortgages worst-hit by foreclosures are leading refinancings after the government expanded programs to aid borrowers, strengthening the weakest link in the housing recovery.
In Nevada, where property values fell by half in the real estate bust, the government's Home Affordable Refinance Program, or HARP, accounted for 68 percent of refinancing in December, the Federal Housing Finance Agency said in a report today. For Florida, 58 percent went through HARP. The states topped the nation in loans more than three months overdue at 2012's end, according to the Mortgage Bankers Association.
The U.S. housing market is rebounding as foreclosure sales drop after a record number of seized properties had dragged on prices and sapped buyer confidence, said Diane Swonk, chief economist at Mesirow Financial in Chicago. There were 1.1 million Harp refinances in 2012, double the year-earlier number and exceeding FHFA estimates, the agency said in the report. Underwater borrowers, with mortgages that exceed their property values, are most at risk of default, Swonk said.
"The biggest hurdle the housing market has to overcome to stay on its upward trajectory is keeping the foreclosure inventory down," Swonk said. "HARP refis are keeping people in their homes, especially in the states where property is severely underwater."
HARP, which has been used by about 2 million borrowers whose loans are backed by Fannie Mae and Freddie Mac since the program started in 2009, originally banned borrowers whose mortgages were more than 25 percent underwater. The new version enacted last year, known as HARP 2.0, removed the restriction. It also lets borrowers refinance through any lender, instead of being restricted to using their existing servicer, and gives lenders more protections from so-called buyback demands by investors, who say the quality of a loan was misrepresented. HARP mortgages were 22 percent of total refinance volume in December, the report said.
"HARP 2.0 is working," said Patrick Ahn, a mortgage bond trader at Los Angeles-based TCW Group Inc. "We've seen many more borrowers take advantage versus the first version."
The inventory of homes in foreclosure fell to 3.74 percent at the end of 2012 from 4.39 percent in the first quarter of 2012 when home prices began to recover, according to the Mortgage Bankers Association. In the same period, home prices rose 8.9 percent from a nine-year low, S&P/Case-Shiller home- price index data show. Home sales in January increased to 4.92 million at an annual rate, 43 percent above a record low two years ago.
Prices may rise 8 percent this year, up from a previous estimate of a 4.7 percent increase, Bank of America Corp. analysts wrote last week.
A tight inventory of properties for sale, low interest rates and record affordability are fueling accelerated price gains, Michelle Meyer, a Bank of America U.S. economist, and Chris Flanagan and Justin Borst, mortgage-backed securities strategists, said in a note to investors titled "Someone say house party?"
"We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying," they wrote in the report. "It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative."
The housing rebound has spurred a rally in home-loan bonds without the backing of the U.S. government. The debt returned an average of about 21 percent last year, according to Amherst Securities Group LP, with some notes tied to subprime borrowers rising more than 40 percent.
So-called non-agency debt will probably go higher in price and be the best-performing sector as the housing supply remains constrained, Jeffrey Gundlach, whose $39.5 billion DoubleLine Total Return Bond Fund beat 97 percent of its peers last year, said last week.
