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Despite MBS Purchases, Housing Recovery May Hinge on HARP

Written By:
November 08, 2011 at 2:46 PM

Although most economists polled in a recent Bloomberg News survey believe that Federal Reserve mortgage-backed bond purchases will stimulate the economy, others believe that it’s going to take a robust new Home Affordable Refinance Program (HARP) for the country to see positive changes.

However, in a press conference last Wednesday Federal Reserve Chairman Ben Bernanke said that purchasing mortgage-backed securities was a “viable option.” The thinking is if the Fed were to purchase mortgage-backed securities the result could be reduced borrowing costs, which would mean lowered monthly payments, putting more cash in consumers’ pocket, ripe for spending.

According to Joseph Gagnon, former Fed economist, this maneuver could save homeowners anywhere from $60 to $80 billion a year or 0.5% of gross domestic product.

Federal Reserve Governor Daniel Tarullo said additional mortgage-securities purchases would “move back up toward the top of the list of options” because “the aggregate -demand effect should be felt not just in new-home purchases, but also in the added purchasing power of existing homeowners who are able to refinance.” Additionally Janet Yellen, Fed Vice Chairman said that this third round of purchases “might become appropriate.”

Recovery Success May Rely On HARP

Although MBS purchases may result in overall savings, many experts contend that economic stimulus depends on whether the millions of homeowners will have access to refinancing.

During congressional testimony last month, Bernanke said that more must be done in order to revive the economy. “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy.”

The average 30-year fixed mortgage rate dropped to 3.94% in October, compared to this year’s high of 5.05%.

Late October, changes were made to HARP in order to provide wider refinancing access to homeowners considered to be “underwater” in their loan. Substantial changes included elimination of the cap that prevented underwater borrowers who owe more than 125% of their property’s worth to refinance, less emphasis on every credit report blemish and new property appraisals can be waived if the Freddie Mac or Fannie Mae valuation model has current, reliable information.

The administration’s original 2009 goal with HARP was to help approximately 5 million borrowers refinance their loan, but the program has only seemed to reach 20% of that goal.

The Federal Housing Finance Agency estimates that the updated version of HARP should help refinance approximately 900,000 loans by the end of 2013. Stephen Stanley, chief economist at Pierpont Securities LLC believes that low mortgage rates won’t matter if you can’t refinance your loan. “If the pipeline is stuck, then it doesn’t matter if mortgage rates are 4 percent, 3.5 percent or zero.”

Some experts believe that security purchases won’t even have a major impact on rates. John Taylor, Stanford University Professor and author of the Taylor Rule formula says that purchases won’t reduce rates “appreciably, and not really in any predictable way.”

Either way, even with current interest rates, the updated version of HARP gives underwater borrowers, sidelined because they owed more than their home’s value, an opportunity to get back in the game.

Sabrina Sullivan, a short sale specialist with regional brokerage Michael Saunders & Co. says that the additional reduction in interest rates for underwater homeowners may be the help they need to stay in their house.

She refers to the example of the homeowner who owes $200,000 on a home now worth $100,000. If the borrower can refinance his 8.5% loan to 5.5% the homeowner saves 3% or a total of $6,000 a year.

"Will $6,000 be enough to keep them in the house?" Sullivan asked. "It might be enough. It might be enough for them to stay 10 years and by then things will be different."

Save the Housing Market; Boost the Economy

Despite the Fed’s numerous efforts, the economy has remained challenged since the housing market bottomed out in 2008. Both economists and real estate experts point directly to the correlation between the housing market and the health of the economy.

Noah Rosenblatt, publisher of says that a mortgage-backed security purchase without access to loans won’t change anything. “They’ve been trying that for two years and it hasn’t worked,” he said. “Banks don’t want to lend in an environment where consumers are deleveraging. You can’t force borrowers to borrow, and you can’t force banks to lend.”

The few homeowners who are still employed and have decent credit have already refinanced in this low-rate environment. But so many more borrowers are in an “underwater” situation that easier access to refinancing under HARP may possibly be the answer to economic stimulus the country has needed.

In a monthly open market committee meeting, Bernanke said, “The housing sector is a very important sector. The problems in that sector are clearly a big reason why our economy is not recovering more quickly.”

He adds that the mortgage market policies have been “blunted?.?.?. very tight credit standards have prevented many people from purchasing or refinancing their homes. The low mortgage rates that we have achieved have not been as effective as we had hoped.”





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