WASHINGTON — A revised plan to help underwater borrowers refinance into historically low interest rates is likely to boost competition among mortgage lenders and roughly double the number of people already helped by the government program, according to analysts and industry representatives.
The Obama administration and federal regulators announced Monday that they would make several changes to the Home Affordable Refinance Program, including eliminating key obstacles that were stopping more homeowners from taking advantage of the plan. Those included broadening the number of eligible mortgages to include those that are deep underwater and scrapping required warranties and representations for lenders.
Analysts said that by eliminating putback risk for servicers, lenders will now actively compete to reach eligible borrowers and increase refinancing activity.
"So if a [Bank of America] borrower has been current for 6 months, basically a Chase originator could go after that borrower, refinance them, and not be held to the original loan file that B of A had," said Matthew Jozoff, a managing director for JPMorgan Chase on a conference call with investors. "Consequently, we think that does increase the willingness of cross-servicing refinancing to take place."
Administration officials agreed, with Gene Sperling, the director of the National Economic Council, saying that the elimination of required warranties and representations would "unleash competition for housing refinance" for loans backed by Fannie Mae and Freddie Mac.
"Consider, right now for Americans who could benefit significantly from refinancing, there is way too little competition and incentive for banks to compete to help those families refinance," Sperling said.
Exactly what kind of impact that will have remains an open question, however. The Federal Housing Finance Agency, the agency that regulates Fannie and Freddie and runs the HARP program, estimated it would help roughly 800,000 borrowers.
Some analysts said that figure is significant, noting that the HARP program has already helped 1 million to date.
"Generally, it's positive. It appears it will expand refinancing opportunities to stressed borrowers," said Brian Harris, an analyst for Moody's Investors Services.
Citing the 800,000 estimate, Harris said, "If you take that as a floor you're at least doubling the program. That's not a trivial adjustment to the program."
But others were more skeptical, suggesting the revised program would have only a "modest impact."
"Even if HARP volume doubles and equals $250 billion over the next two years, it would still mean that HARP volume would account for about 10% of total volume," wrote Bose George, an analyst for Keefe, Bruyette & Woods.
Administration officials declined to offer a specific figure, instead pointing to a speech from Federal Reserve Board Gov. Betsy Duke who said 4 million borrowers are eligible for HARP.
Reduced barriers announced by FHFA could even "modestly expand that universe," Sperling said.
The program is the latest in a long list of attempts by the administration to help the housing market, with most showing unimpressive results. Administration officials acknowledged as much in a conference call with reporters, but said the latest moves would help the market and boost the economy.
"It has not reached the scale that we had hoped and the scale that it needs to reach to be able to unlock this potential tool to help those families and the American economy further," said Shaun Donovan, secretary of the Housing and Urban Development Department. The series of steps taken by the FHFA, he said, will allow "responsible borrowers with little to no equity in their homes to take advantage of today's record low interest rate."
Those homeowners who would be able to take advantage of the program could see a savings of $2,500 a year or more, or the "equivalent of a substantial tax cut," Donovan said.
For now, the program will be limited to borrowers with underwater mortgages — loans defined as having a loan-to-value ratio of 80% or more — and owned by Fannie and Freddie. The administration hinted it may open the program up further to mortgages with a lower LTV at a later date, but did not provide any further details.
The changes proposed by FHFA — which the private sector collaborated on — will allow borrowers whose homes are more than 25% underwater to become eligible to refinance by removing the current LTV ceiling of 125%. The agency also scrapped a number of costly refinancing expenses that have kept struggling homeowners from participating, as well as extended the length of the program by 18 months until Dec. 31, 2013 to secure private sector commitment.
To qualify, borrowers must be current on their mortgage payments with no late payments in the past six months and no more than one late payment in the last year. Donovan said there would be a "modest fee" associated with removing required reps and warrants, but said details won't be clear until a formal plan is unveiled by FHFA on Nov. 15.
The revised program coincides with a number of steps the White House will be taking in the coming weeks as part of the administration's "We Can't Wait" campaign to push Congress — which has lagged largely due to Republican opposition — to enact the American Jobs Act. President Obama touted the changes during a speech Monday in Las Vegas.
"There are still millions of Americans who have worked hard and acted responsibly, paying their mortgage payments on time. But now that their homes are worth less than they owe on their mortgage, they can't get refinancing," Obama said in prepared remarks.
Steps outlined by the FHFA "will help more homeowners refinance at lower rates, save consumers money and help get folks spending again," he said.
The changes are also intended to incentivize underwater homeowners to obtain shorter-term mortgages so they can pay down the amount they owe faster than under a traditional 30-year fixed mortgage.
"By shortening the term of the mortgage, the borrower will be repaying principal faster and hence be back above water at a faster rate and that gives the borrower greater financial options and it is certainly also an opportunity to strengthen the borrower's household balance sheet," acting FHFA director Edward DeMarco, told reporters on a conference call announcing the tweaked program.
But Edward Mills, a research analyst for FBR Capital Markets, said such a push may make it more difficult to generate greater interest in the program.
"It seemed like FHFA was saying, 'Look here were the issues that were identified as problems. I'm willing to give up on those issues, but in exchange for that the borrower has to take out a loan that is a shortage duration, which is going to make the end product far less attractive to that borrower,'" said Mills.
Citing an example used by FHFA, if a borrower chose to refinance its mortgage into a 20-year loan term at a 4.25 mortgage rate, it would get a savings of $26 dollars a month. (It would also reach its loan balance of $160,000 in five and half years.)
"It's going to be hard to convince a borrower to go through this program, provide a certain level of documentation, perhaps even have closing costs, for a theoretical reduction in the length of their mortgage something that might not happen, or really they don't see the benefit for another 20 years," said Mills.
Other critics said the changes could establish two parallel systems of mortgage origination. After years of being under the gun and threatened with litigation, originators are being told to ease standards, said Bert Ely, an independent analyst in Alexandria, Va.
"For home purchases we're going to do it the traditional way and reflect the standards that people are trying to put back in place, and then we're going to have a parallel system that is much more liberal," Ely said. "How well are those two systems going to work side-by-side, particularly in the same organization?
"It's tough to be successful at managing, within one organization, two different levels of quality," he added.
Still, some banks were enthusiastic about the changes.
Ally Financial Inc.'s GMAC Mortgage said it "will fully adopt the enhancements to HARP" and offer the new plan to "qualifying borrowers."
"Many homeowners are living in areas where home values have dropped significantly, which often prevents them from getting assistance," said Gina Proia, an Ally spokeswoman.