Surprise on Refi Revamp: Key Regulator Agrees to Major Program Reforms

by Paul Kiel

Last month, we noted that the Obama administration's push to allow more underwater homeowners to refinance faced a major barrier: the regulator for Fannie Mae and Freddie Mac. Federal Housing Finance Agency chief Edward DeMarco had blocked earlier efforts to help underwater homeowners.

But yesterday morning, the administration announced major changes to its refinancing program -- changes beyond what analysts were expecting.

One of the main reasons the program hadn't reached many homeowners is that banks have been reluctant to participate. The revamped program offers the banks a major incentive: If they grant a homeowner a new loan, they will no longer be on the hook to buy back the previous loan, even if it was not properly underwritten. That removes a large potential risk to the banks.

Launched in 2009, the Home Affordable Refinance Program (HARP) was designed to allow homeowners with little or no equity in their homes to take advantage of low interest rates, so long as their loans were backed by Fannie Mae or Freddie Mac, which back more than half of all U.S. residential mortgages. Normally, such homeowners wouldn't qualify for refinancing. Back then, the administration said "up to 4 to 5 million" homeowners would be able to take part.

But the program has fallen far short. As of August, about 894,000 homeowners had refinanced through the program. And only about seven percent of those homeowners were significantly underwater.

This morning, the Federal Housing Finance Agency announced a slew of reforms to improve the program's reach, changes that it estimated could double the number of homeowners helped. The program will now be open to all homeowners with little or no equity, regardless of how underwater they are, provided they got their loan before June 2009. (Previously, the program had been limited to borrowers who were no more than 25% underwater on their loan).

Many of the specific reforms seek to make it cheaper for homeowners to refinance by reducing various costs and fees associated with refinancing. Some changes are technical and address problems that homeowners with mortgage insurance or a second mortgage have encountered in getting a refinance.

But on a conference call with reporters this morning, administration officials emphasized one reform in particular that's likely to be key: releasing lenders from so-called buy-back risk.