BLOG VIEW: As the Obama administration and the Federal Housing Finance Agency (FHFA) examine ways to remove refinancing hurdles for underwater borrowers, the Senate Banking Subcommittee on Housing, Transportation and Community Development heard disparate views Wednesday regarding how effective such an initiative might be.
A mass refinancing plan is ‘the best way to get money into our economy quickly,’ said Sen. Barbara Boxer, D-Calif., and author of S.170, legislation that would enable negative-equity loans backed or guaranteed by Fannie Mae and Freddie Mac to refinance at market rates.
At the end of the second quarter, approximately 10.9 million properties were in negative equity, CoreLogic reported this week. Of those borrowers, 8 million have loans with above-market mortgage rates, the firm's data shows.
The bipartisan S.170, co-sponsored by Sen. Jonny Isakson, R-Ga., would also lower refinancing costs incurred by borrowers, and it would be limited to homeowners who are current on their loans. Passing the legislation would help deter borrowers from strategically defaulting, Isakson said Wednesday.
Subcommittee Chairman Sen. Robert Menendez, D-N.J., said he hoped that the FHFA does not wait for Congress to act on the legislation. The agency has the authority to make over the federal Home Affordable Refinance Program (HARP), and Acting Director Ed DeMarco has already stated that the FHFA is "carefully reviewing" HARP's mechanics to identify frictions that are hindering the program's uptake.
According to the testimony of Moody's Analytics Chief Economist Mark Zandi, making "modest adjustments" to HARP is one of two steps that the administration can take to provide immediate and meaningful assistance to the housing market. The other step, he said, would be to extend the temporary conforming loan limits, which are currently slated to expire at the end of this month.
Rolling back loan-level pricing adjustments in HARP transactions "makes eminent sense to me," Zandi said. He further proposed that HARP's underwriting process become more streamlined by eliminating appraisals or income verifications, which can raise costs to borrowers. Additionally, refinancing lenders should be indemnified against representation and warranty liability by the government-sponsored enterprises (GSEs), he said.
Lenders' fear of putback risk associated with refinancings has been pinpointed as one reason why HARP has not seen higher levels of participation.
Eliminating the risk-based pricing (i.e., killing the loan-level pricing adjustments) and waiving repurchase liability against lenders would be prudent for the GSEs to do, Zandi said, because the GSEs already assume the credit risk of the existing loans. However, HARP adjustments are not a silver bullet, he cautioned.
"All of the things we're talking about are on the margin," he said, adding moments later, "Moreover, it's important not to overreach. Uncertainty is an issue in the mortgage market, and what I think lenders, servicers and everybody needs is policy clarity to nail this down."
Mortgage Bankers Association (MBA) President David H. Stevens advocated similar changes to HARP's guidelines. The trade group supports raising HARP's loan-to-value requirements, as well as allowing loans originated after June 2009 to be eligible for the program, Stevens said.
There were also dissenters on the witness panel who said they believe the benefits of a mass refinance program may be overstated.
Last week, the nonpartisan Congressional Budget Office (CBO) released an unofficial estimate based upon a stylized scenario in which 2.9 million borrowers would refinance their loans. According to the paper, the GSEs would realize savings in connection with 111,000 loans that, absent a refinancing, would likely default. However, the paper also found that investors of agency mortgage-backed securities (MBS) would suffer as a result of broader refinancing, incurring losses of between $4.5 billion and $15 billion, depending on whether the investor is a federal or private entity.
Using the CBO paper as a reference point, Anthony Sanders, a finance professor at the George Mason University School of Management, said there would be little stimulative impact from refinancing 2.9 million loans at current market rates.
However, others suggested that the CBO low-balled the number of likely candidates. Boxer estimated that S.170 could help as many as 4 million borrowers, with close to 5 million borrowers being eligible. A more robust HARP could assist up to 5 million borrowers, Zandi said.
Another risk of changing the requirements of refinancing programs – whether through legislation, an FHFA-mandated HARP revamp or some other means – is unintended consequences, according to the testimony of Ivy Zelman, CEO of research firm Zelman and Associates. Numerous panelists said a mass refinance program could result in litigation and disputes over contract law, especially as it relates to the potential negative impact on MBS investors and subordinate lienors.
"More importantly, we don't know for certain if borrowers will not walk away even after obtaining a lower rate," Zelman said.
Loan limits
The Senate Banking subcommittee also heard comments regarding the upcoming expiration of conforming loan limits. Isakson and Menendez have introduced legislation that seeks to extend current loan limits through the end of 2013.
Without congressional action, the current conforming loan ceiling of $729,750 for high-cost areas would drop down to $625,500 starting Oct. 1.
Most panelists who testified Wednesday supported extending the higher limits. Federal officials, including HUD Secretary Shaun Donovan, have identified reducing the conforming loan limits as one of the first steps the administration should take to begin shrinking the government's role in housing finance.
Zelman and Realogy Corp. CEO Richard Smith both testified in favor of extending the loan limits. Sanders and Zandi, who both previously endorsed lowering the conforming loan limits back when the housing recovery appeared less fragile, noted that current market conditions warrant continued government support at this time.
REO rentals, SAMs
Panelists also testified about foreclosure prevention and the huge overhang of distressed product on the marketplace. Regarding the latter, the FHFA recently issued a request for information (RFI) tapping the private sector for suggestions on how federal housing agencies can responsibly clear their inventories of real estate owned properties (REOs). The RFI has renewed interest in the topic of converting REOs into rental units.
"In order for any large-scale program to be successful, it should be simple, quick to administer and attractive to investors," said Stevens. The GSEs should consider mechanisms that allow investors to identify and pool REO properties, he added.
A well-crafted rental program that allows for the orderly disposition of distressed properties could help instill confidence in the housing market, Zelman said. Confidence is created by mitigating inflation, and for that to happen, demand and supply need to be brought back into balance, she said, stressing that the large inventory of vacant homes needs to be absorbed. She estimates that the occupancy rate for rental properties is high, at around 90%.
Clearing the shadow inventory could also help bring into the marketplace potential home buyers who are waiting for better deals and bottom-of-the-market pricing, Realogy's Smith said. Realogy owns a large portfolio of real estate holdings, including firms Century 21 and Coldwell Banker.
"I believe the market will correct itself, but it needs some help," Smith said. "In this case, the overhang needs to be lifted permanently."
On the foreclosure-prevention front, panelists agreed that a relatively little-used product – the shared-appreciation mortgage (SAM) – could find traction with servicers. The federal government and some of the more aggressive default shops have toyed with debt-for-equity programs in the past, and Ocwen Financial Corp. recently announced it is expanding its pilot SAM initiative. The pilot program yielded a 79% borrower acceptance rate and only a 2.63% redefault rate, Ocwen says.
Menendez is among lawmakers pushing for broader servicer use of SAMs, or similar loss mitigation strategies. Although Sanders agreed that SAMs have "tremendous potential," he noted two apparent drawbacks. First, there is the potential for moral hazard. Second, investor appetite for such a product is limited, and servicers and lenders may be hard-pressed to find capital market support. Sanders pointed to a SAM experiment conducted by the Bank of Scotland.
The SAM "was very popular with borrowers, but secondary market participants were nervous about a bond where the payoff was tied to home prices, and no more SAMs were originated by Bank of Scotland," Sanders said in prepared testimony.
The House takes up counseling
Meanwhile, over in the House of Representatives, the Financial Services Subcommittee on Insurance, Housing and Community Opportunity heard testimony regarding housing counseling.
Earlier this year, Congress eliminated $88 million of fiscal year 2011 funding for HUD's Housing Counseling Program (HCP). Failure to approve funding in fiscal year 2012 would risk stalling the recovery of the U.S. housing markets, lawmakers were told Wednesday.
According to the testimony of Deborah C. Holston, HUD's acting deputy secretary for single-family housing, HUD-approved counseling agencies will face a funding gap if FY 2012 appropriations are not approved.
"This cut jeopardizes the vital consumer protections housing counselors provide nationwide, and restoration of these funds is important to the recovery and stability of our housing markets," Holston said in prepared testimony.
One of the most widely cited reasons for why Congress opted to slash HCP's funding was that the program overlapped with NeighborWorks' National Foreclosure Mitigation Counseling (NFMC) program.
But according to Holston, the two programs "play distinct roles and serve different populations." Whereas the NFMC is restricted to only foreclosure prevention counseling, the broader HUD program provides post-purchase foreclosure prevention counseling in addition to counseling services for prospective home buyers and reverse mortgage borrowers. HUD also estimates that more than 600 local counseling agencies are eligible for HUD grant funds, but not NFMC funds.
Supporters say counseling agencies provide tangible benefits to borrowers.
‘In the darkest days of this financial crisis, in my congressional district, it has been the counselors – not the array of new federal foreclosure programs – that have helped many families restructure their budget, communicate with lenders or servicers, avoid foreclosure and stay in their homes,’ said subcommittee Chair Rep. Judy Biggert, R-Ill. She described counselors as the "first line of defense" to prevent another foreclosure crisis.
Compared to other distressed borrowers, homeowners who received counseling through the NFMC program are 70% more likely to catch up on payments and 45% less likely to redefault, according to a study published by the Urban Institute. Separate research conducted on HUD's behalf by Abt Associates found that of the clients who received HUD-funded foreclosure counseling between August and December 2009, 84% were still living in their homes and 67% were current on their payments. The Abt study is due out in November.
Moreover, counseling has become a fundamental element of the reverse mortgage industry, said Peter Bell, president of the National Reverse Mortgage Lenders Association. In authorizing the FHA's Home Equity Conversion Mortgage (HECM) program in 1987, Congress made reverse mortgage counseling a requirement.
"Counseling has become a hallmark of the HECM program," Bell said. "It is a very effective consumer safeguard, and its impact can be seen in the limited and isolated number of instances where there has been evidence of fraud or elder financial abuse within the HECM program."
Since 2005, nearly half a million seniors have received reverse mortgage counseling through HUD's program, often at no cost, Holston said. HUD provides the services free of charge for borrowers who are below 200% of the federal poverty line.
Although foreclosure mitigation counseling does correspond with improved recidivism rates, the benefits of pre-purchase counseling are less clear, said Alicia Puente Cackley, the Government Accountability Office's director of financial markets and community investment.
"One study concluded that such counseling lowered the default rate for new homeowners, but other studies showed no effect," Cackley said, adding that a lack of data has hindered researchers' ability to study the impact of homeownership counseling.
