The Urban Institute (UI) is advocating an optimized refinancing program similar to the Home Affordable Refinance Program (HARP), which helped many homeowners support those affected by the pandemic during the Great Recession. HARP, which was used by more than 3.4 million borrowers between 2009 and 2018, offered simplified documentation, automated assessments, no or reduced rate adjustments at the loan level, and portability of mortgage insurance to existing GSE borrowers (Fannie Mae and Freddie Mac). Because house prices had dropped dramatically and many borrowers remained underwater, Eligibility was determined independently of the current loan-to-value (LTV) ratio of a mortgage.
UI analysts Laurie Goodman and Edward Golding write that studies have estimated that by lowering monthly mortgage payments, HARP reduced default rates for those mortgages by up to 62 percent. They note that while policymakers acted quickly to impose forbearance and foreclosure moratoriums when COVID-19 went into effect, no effort was made to restart HARP or initiate a similar program.
In the current low interest rate environment, those borrowers who had used the refinance tended to have high credit scores and large loans and were not among those who lost jobs or lost income during the pandemic. The households that were hardest hit are likely to have been
excluded from refinancing optionsand these borrowers are disproportionately black and Latin American.
Although most homeowners already have a mortgage and a lower interest rate would make those loans less risky, credit tightened before the pandemic and has tightened since then, especially for refinancing. UI research shows that as of January 2019, 29.3 percent of Fannie Mae refinance loans had credit scores below 700. This proportion fell a year later to 14.8 percent and by January 2021 to 9.4 percent. With a high debt ratio (DTI) or a high LTV ratio, the tightening was even more dramatic – from 13.6 percent in January 2019 to 3, 2 percent this January.
As a result, of the Fannie Mae loans taken out in 2018, 51 percent of borrowers with credit scores below 680 remain in those loans, compared with 31 percent of borrowers with credit scores of 760 or higher. As low-score borrowers already Fail more frequently than those with higher scores, an optimized refinancing program that lowered mortgage payments would benefit these borrowers disproportionately and reduce their likelihood of default.
Data collected under the Home Mortgage Disclosure Act shows that differences in mortgage rates by race and ethnicity are small at the outset and can be explained in part by differences in credit characteristics. However, the differences between the outstanding loans are larger, indicating that black and Latin American borrowers have greater difficulty in refinancing. The authors say they focused on credit scores because the data is available
However, problems related to loss of income are likely to affect refinancing as well.
By reducing monthly payments, a HARP-like program would have several advantages. This could stimulate economic activity as borrowers in weak financial positions are likely to use these savings for immediate consumption. For those hardest hit by the pandemic, these savings could help meet basic needs at a low cost to the GSEs while reducing the risk of default on loans already insured. The GSEs sold much of this risk through credit risk transfer programs, forcing them to return the risk to their own balance sheets or to new pools on less favorable terms. Still, The real cost would be small given the recent sharp appreciation in property prices. The GSEs can also evaluate these optimized programs in determining their warranty fees.
Goodman and Goldman conclude that by implementing a streamlined refinancing program modeled on HARP, policymakers could remove refinancing barriers and help borrowers with low credit scores, low incomes, and small loans who are disproportionately black and Latin American, their financials Strengthen their situation and avoid their home loan default. This should be done while the rates are still low enough for the program to take effect.