Do We Need HARP 3.0?

First there was the Home Affordable Refinance Program (HARP), and then there was HARP 2.0. But is there going to be a HARP 3.0?

In May, President Obama called on Congress to give ‘every responsible homeowner’ the chance to refinance into today's low interest rates. But the two iterations of HARP were only designed for people whose existing mortgages are owned or have been securitized by Fannie Mae and Freddie Mac.

Several variations of a third installment of HARP have been discussed. The most common, and potentially biggest, one would help those homeowners with high-rate mortgages whose loans are not owned by the government-sponsored enterprises (GSEs) but are current on their loans. Many of those people got their mortgages before the industry bust in 2007 from a subprime or Alt-A lender. But the majority of those people have been unable to refinance either through HARP or through a conventional loan because their homes have lost value and they owe more on their mortgage than their house is worth.
‘People with subprime and Alt-A loans haven't gotten any love,’ says Andrew WeissMalik, chief operating officer and head of capital markets at Austin, Texas-based 360 Mortgage Group.

According to market professionals, the potential size of a HARP 3.0 group could be quite meaningful.

‘There are still a lot of people out there whose loan is not owned by Fannie or Freddie,’ says John McClellan, manager of the Austin, Texas-based branch of Supreme Lending. ‘At least 20 percent of loans, if not a whole lot more, that were originated in 2005 through 2008 are not owned by Fannie or Freddie.’

If this group were allowed to take advantage of an expanded HARP and permitted to refinance into a loan guaranteed by Fannie or Freddie, it could mean an additional shot in the arm to a mortgage industry desperate for new loan volume.

‘Before the mortgage crisis, we did lots of Alt-A and subprime loans that were not purchased by Fannie and Freddie,’ says John Walsh, president of Total Mortgage Services, based in Milford, Conn. ‘If subprime loans could be refinanced into Fannie and Freddie loans, you would really see HARP pop.’
Michael Isaacs, CEO of Residential Finance Corp., based in Columbus, Ohio, says his company currently does about 100 HARP loans a month. ‘We could double that amount with HARP 3.0. We're a small company, but if that's what we would experience, then it's reasonable to expect that the rest of the industry would too,’ he says. ‘For every person we talk to about doing a HARP refi, two out of three do not qualify because their loans are not owned by the GSEs. Of those, 50 percent would qualify under HARP 3.0. That's a big number.’

Rick Sharga, executive vice president of Carrington Mortgage Holdings, based in Santa Ana, Calif., estimates that there are 1.25 million subprime borrowers who are current – out of 2.1 million overall – who are not in GSE portfolios. About 20% to 30% of them are underwater on their mortgages, meaning 250,000 to 360,000 would be eligible. This would be a smaller pool of homeowners than the existing HARP programs, but still a sizable one.

But getting to HARP 3.0 will be a lot more difficult than the previous two versions, mainly because it will mean shifting the risk on these loans from the private sector to the GSEs – i.e., the taxpayers.
‘My own opinion is: This idea won't work, especially during an election year,’ says Stuart Feldstein, president of SMR Research Corp., based in Hackettstown, N.J. ‘Fannie and Freddie would surely oppose the idea of purposely taking on low-credit-score loans – the one and only thing they didn't do wrong in the past. If the Obama administration pushed the concept, the Republicans would point to a new taxpayer bailout.’

The idea might work in theory, Feldstein says, since it would likely be limited to people current on their mortgage payments. If they are paying on time now, they would presumably still do so after refinancing into a loan that lowers their monthly debt load. But he notes that people with low credit scores usually have some other current credit trouble – if not on their mortgage, then on their credit cards or some other debts – so they're still risky.

‘I don't think it's politically possible to shift their risk over to the general public, which tends not to sympathize much with folks who don't pay their bills on time,’ Feldstein says.
But others are more hopeful that HARP will be expanded in order to boost both the housing sector and the economy at large.

‘My gut tells me this will happen, in some form,’ Isaacs says. ‘When you look at the government programs that have been rolled out since 2007 and their cost to taxpayers and compare it to HARP, the amount of money that will flow into the economy will come at a relatively low cost to the taxpayers. There are so many people it could help that I believe it will get the support it needs.’

‘HARP is apolitical,’ adds WeissMalik. ‘I could see either party being elected passing HARP 3.0 – there is no reason not to support it. It would be a huge benefit to the U.S. economy. The $200 or $300 homeowners save each month would be plowed back into the economy.’

‘I think that unless market conditions begin to improve noticeably, we're almost certainly going to see more government intervention,’ Sharga says. ‘But whether it's HARP 3.0, or something else entirely – shared appreciation programs, freeing up retirement accounts as collateral against existing loans, massive refinancing of conventional current loans as a means of economic stimulus – we're going to see something from Washington if things don't pick up in the near future.’

However, Sharga believes that any new government-sponsored program is most likely going to be aimed at borrowers who appear to be the most disadvantaged, meaning subprime borrowers who are in underwater loans and delinquent, not those who are current on their loans.

‘You have to decide which problem you're trying to solve,’ he continues. ‘If you're trying to avoid foreclosures, then it would make more sense to try to refinance people who are delinquent. But then you open up the problem of people purposely going delinquent in order to refinance. That shows you how complex the problem really is.’

George Yacik is a Stratford, Conn.-based financial writer. He can be reached at


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