Lender reluctance stifles HARP's effectiveness: Fed Gov. Duke
Despite 4 million borrowers qualifying for the Home Affordable Refinance Program, Federal Reserve Governor Elizabeth Duke said lenders are reluctant to push the program out of fear the review process will highlight underwriting issues, forcing financial institutions to take on "putback risk." During a speech in Washington Thursday, Duke said putback risk "is the possibility that a loan originator will have to repurchase a loan from the government-sponsored enterprises because the underwriting violated GSE guidelines." Because lenders fear underwriting reviews on loans filed through HARP — many of which were acquired from other originators — the refinance program is not reaching its full potential, Duke said. To date, only 800,000 borrowers have refinanced mortgages through the program. Duke told a housing conference the program could attract more lenders if authorities show a willingness to substitute a minimum number of timely payments as a "proxy for sound original underwriting." She said this construction would "relieve the liability of the refinancing lender for the mistakes of previous lenders." Other barriers to HARP participation include loan-level pricing adjustments — or upfront fees added to refinancing costs — junior lien holders who refuse to allow their loans to remain subordinate to a newly refinanced loan and mortgage insurers who will not agree to re-underwrite policies, Duke said. "The common theme in all of these frictions is that, in each case, the parties to the transaction are applying standard risk-management tools that would normally apply to low- or no-equity loans, but they are applying them to risk they already own," Duke said. "The economics of the situation suggests that if the first mortgage becomes more affordable, the existing risk exposure of all credit risk holders actually decreases." Duke also used her speech Thursday to advocate for policies that would turn REO properties into rentals. "The weak demand in the owner-occupied housing market and the relatively high demand in the rental housing market suggest that transitioning some REO properties to rental housing might benefit both markets," Duke said. Duke said any REO-to-rental conversion program will need to be cost effective, allowing participants to obtain a critical mass of properties of a hundred or more in limited geographic regions. She added that any conversion program implemented has to ensure neighborhood foreclosure blight is not replaced by rundown rental property. Write to: Kerri Panchuk.