Let’s Do HARP Correctly

The important condition of HARP is that it only refinances existing FNMA/FHLMC mortgages. The reasoning is simple: How could these entities be taking on increased risk if they are simply refinancing the same mortgages with the same loan amounts at lower interest rates to the borrowers? A lower interest rate and payment is less burden on the borrowers and translates into lower default rates and consequently less risk to FNMA/FHLMC and the taxpayers.

The suggested changes to HARP contained in the FHFA press release of 10/24/2011 are a start but containing flaws. These flaws can easily be remedied.

(1) The plan calls for only loans purchased by FNMA and FHLMC before May 31, 2009 to be eligible. Why leave behind those who purchased since then and now have what may be 85% loan to value ratios? It is not the case that the effects of the mortgage mess ended on May 31, 2009.

(2) the offering of better LLPA (loan level price adjustments) for 15 year mortgages than for 30 year mortgages is a macroeconomic mistake.

Unless we can increase GDP we will continue to have large deficits and high unemployment. Why induce people to 15 year mortgages? Allowing the same reduced LLPA’s for 30 year as for 15 year gives people a lower mortgage payment (because of the longer amortization) and that translates into more disposable income. More disposable income is a necessary condition for GDP growth. GDP will grow only when the consumer starts spending more.

It may not be evident to those outside the mortgage industry but it is the easing of representations and warranties which makes HARP 2.0 enormously more attractive to lenders than the original HARP. The present level of reps and warranties in onerous and, coupled with FNMA and FHLMC’s aggressive buyback demands, has discouraged mortgage lending.

The lower monthly payment is an ongoing, continuous thing and economists agree that it is ongoing increases in disposable income which translate into increased spending.

We are at a time when the economy is burdened with low GDP growth, high unemployment, overleveraged consumers, and a failure of both fiscal and monetary policy to make things better. It is imperative that we realize that we need to make a series of correct economic decisions to get ourselves out of this morass. A HARP program with the changes suggested here is one step.