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On the heels of President Obama's congressional address last week, which referenced the administration's goal of easing refinance terms for underwater borrowers, two federal officials have confirmed that the Federal Housing Finance Agency (FHFA) is exploring its options.

In a statement Friday, the government-sponsored enterprises' conservator explained that it is evaluating ways to boost participation in the Home Affordable Refinance Program (HARP). Treasury Secretary Tim Geithner, meanwhile, told National Public Radio that details of a revamped HARP could be released in the “next three weeks or so.”

“They're very supportive of moving in this direction,” Geithner said of the FHFA. “It's their authority, though, not the president's.”

Through the end of the second quarter, more than 838,000 borrowers had refinanced through HARP, which the Obama administration introduced in early 2009. In Friday’s statement, FHFA Acting Director Edward J. DeMarco called the number of HARP refinances "meaningful but fewer than expected or eligible for the program.”

To be eligible for a HARP refinance, borrowers must be current on their loans and carry a loan-to-value ratio (LTV) between 80% and 125%. Fannie Mae and Freddie Mac have executed more than 1 million “streamlined” refinances outside of HARP and nearly 7 million standard “rate and term” refinances, DeMarco said.
“FHFA is carefully reviewing the mechanics of the HARP program to identify possible enhancements that would reduce barriers for borrowers already otherwise eligible to refinance using HARP,” he said. “If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program's intent of assisting borrowers and reducing credit risk for the enterprises, we will seek to do so.”

Among the frictions thought to preclude broader HARP participation are loan-level pricing adjustments (LLPAs), a form of risk-based pricing that lenders bake into refinance costs for borrowers whose loans are considered high risk.

Another such friction, according to a recent speech by Federal Reserve Board Governor Elizabeth Duke, is limited lender competition for refinanced mortgages, which Duke attributed to lenders’ fear of putback risk. When a lender refinances a loan, the lender is liable for repurchase risk on not only the new loan, but also the original loan, even if the refinancing lender did not underwrite it.

Barclays Capital analysts have interpreted the FHFA statement to mean that the agency “is not looking to increase the amount of borrowers eligible for the HARP program by expanding the cut-off date, but is rather looking to enhance the efficacy of the existing program for current HARP-eligible borrowers.” The analysts believe the FHFA will focus specifically on options meant to help good-quality, high-LTV borrowers.

“While it could take incremental steps such as reducing LLPAs, the most important step, in our view, would be a limited easing/waiving of rep and warranty risk for this targeted set of borrowers,” the analysts wrote. “While we have made the case earlier that this is not straightforward, we think this statement raises the possibility of some initiative in this direction.”


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