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Wells Fargo Deals Major Setback to Administration Refinance Program

Wells Fargo won't help refinance mortgages from other servicers (Steve Rhodes, Flickr)

An unusual technological quirk has delayed the Administration’s signature program for refinancing mortgages, and now it may lead to it becoming significantly narrowed from the original vision.

The President announced a new initiative for HARP, the government’s mass refinancing program, all the way back in October. The idea was that Fannie Mae and Freddie Mac would allow a larger eligibility for refinancing on current underwater loans that they owned or guaranteed, and as an incentive to get the servicers to do the job, they would waive “representations and warranties” claims on the loans. This means that, if the loans failed, Fannie and Freddie would not try to get the underlying banks from which they bought them to repurchase the loans back from them. This eliminated a significant liability for the banks, and the thinking was that this would accelerate refinancing for millions of borrowers.

I’ve said consistently that this is more a program for stimulus than a program for saving homes. It only affects current borrowers, for example, and refis usually don’t prevent defaults nearly as well as principal modifications. However, if you believe – and many analysts, like Laurie Goodman at Amherst Securities – that underwater borrowers represent the leading edge of problems in the mortgage market, and their precarious situations put them one bad break away from delinquency or foreclosure, then it’s a good idea to allow them to reduce their monthly payments with a refi, even if ultimately they would continue to stay in negative equity. The Administration added some encouragements to apply the savings from the refis to principal pay-downs, which would reduce negative equity.

Anyway, we’ve been waiting since October for this crush of refis, and they haven’t really appeared. Refinance activity has actually fallen of late, though the percentage of those refis coming through HARP has increased. However, if you’re just re-routing refis through HARP without increasing them overall, that doesn’t complete the purpose of tweaking the government program. The idea was to get lots of extra refis and transfer wealth from banks to homeowners by lowering interest rates.

Alone among most commentators, the website Calculated Risk had an explanation for the lack of a refi surge. There’s a program called Desktop Underwriter, which automates the underwriting process that has to be done for refinances. The elimination of representations and warranties, the key element of unlocking refis for the banks, had to be inputted into Desktop Underwriter. And it took many months for that program to actually get updated with the reps and warranties piece incorporated. That happened over the weekend, and so lenders can now use this automated system for refinancing, without having to be the initial servicer of the original loan. This is how most refis work – you can go to anyone for the new loan. With Desktop Underwriter complete, the theory went, we should see a surge of refi activity in the next several weeks. [cont’d.]

Except that one of the biggest mortgage lenders in the country, Wells Fargo, decided to limit their participation in the program to loans that they also service. This makes Wells basically inaccessible to other borrowers who want to use HARP 2.0.

Wells Fargo has decided to limit HARP 2.0 to loans that Wells services. If Wells is not the current servicer, then Wells will limit LTV to 105% – the same as HARP 1.0 guidelines. Wells Fargo wrote:

“After further assessment of the new parameters for DU Refi Plus transactions, and the current market environment, Wells Fargo has reconsidered our policy regarding loans not currently serviced by Wells Fargo. As a result we will not offer unlimited LTV/CLTV options for Loans not currently serviced by Wells Fargo.”

Furthermore, Wells announced that they would delay once again the use of HARP 2.0 loans on those that they service until late April.

Put it this way. If every major servicer and lender followed Wells’ lead – and there are only a few others – HARP 2.0’s impact would be significantly limited. You would have to stay with your own servicer for your refi. And the servicer may not want to refinance you if you’re a current borrower, or they may offer you alternative products. The inability for the borrower to have flexibility, to shop around for the best rates, to use someone other than their current circumstance, will dampen the use of HARP, almost certainly. I’d guess that the total refi balance will end up, at the big 5 servicers, to be not much more than the $3 billion in refis they are obligated to perform under the foreclosure fraud settlement (and yes, HARP refis can apply to that, which means they get their Fannie and Freddie liability extinguished inside the settlement).

So we have yet another Administration housing program announced to much fanfare, whose ultimate result will disappoint. And the main reason for this is the discretionary nature of how the banks can use the programs. Deja vu all over again.

CommunityThe Bullpen

Wells Fargo Deals Major Setback to Administration Refinance Program

An unusual technological quirk has delayed the Administration’s signature program for refinancing mortgages, and now it may lead to it becoming significantly narrowed from the original vision.

The President announced a new initiative for HARP, the government’s mass refinancing program, all the way back in October. The idea was that Fannie Mae and Freddie Mac would allow a larger eligibility for refinancing on current underwater loans that they owned or guaranteed, and as an incentive to get the servicers to do the job, they would waive “representations and warranties” claims on the loans. This means that, if the loans failed, Fannie and Freddie would not try to get the underlying banks from which they bought them to repurchase the loans back from them. This eliminated a significant liability for the banks, and the thinking was that this would accelerate refinancing for millions of borrowers.

I’ve said consistently that this is more a program for stimulus than a program for saving homes. It only affects current borrowers, for example, and refis usually don’t prevent defaults nearly as well as principal modifications. However, if you believe – and many analysts, like Laurie Goodman at Amherst Securities – that underwater borrowers represent the leading edge of problems in the mortgage market, and their precarious situations put them one bad break away from delinquency or foreclosure, then it’s a good idea to allow them to reduce their monthly payments with a refi, even if ultimately they would continue to stay in negative equity. The Administration added some encouragements to apply the savings from the refis to principal pay-downs, which would reduce negative equity.

Anyway, we’ve been waiting since October for this crush of refis, and they haven’t really appeared. Refinance activity has actually fallen of late, though the percentage of those refis coming through HARP has increased. However, if you’re just re-routing refis through HARP without increasing them overall, that doesn’t complete the purpose of tweaking the government program. The idea was to get lots of extra refis and transfer wealth from banks to homeowners by lowering interest rates.

Alone among most commentators, the website Calculated Risk had an explanation for the lack of a refi surge. There’s a program called Desktop Underwriter, which automates the underwriting process that has to be done for refinances. The elimination of representations and warranties, the key element of unlocking refis for the banks, had to be inputted into Desktop Underwriter. And it took many months for that program to actually get updated with the reps and warranties piece incorporated. That happened over the weekend, and so lenders can now use this automated system for refinancing, without having to be the initial servicer of the original loan. This is how most refis work – you can go to anyone for the new loan. With Desktop Underwriter complete, the theory went, we should see a surge of refi activity in the next several weeks.

Except that one of the biggest mortgage lenders in the country, Wells Fargo, decided to limit their participation in the program to loans that they also service. This makes Wells basically inaccessible to other borrowers who want to use HARP 2.0.

Wells Fargo has decided to limit HARP 2.0 to loans that Wells services. If Wells is not the current servicer, then Wells will limit LTV to 105% – the same as HARP 1.0 guidelines. Wells Fargo wrote:

“After further assessment of the new parameters for DU Refi Plus transactions, and the current market environment, Wells Fargo has reconsidered our policy regarding loans not currently serviced by Wells Fargo. As a result we will not offer unlimited LTV/CLTV options for Loans not currently serviced by Wells Fargo.”

Furthermore, Wells announced that they would delay once again the use of HARP 2.0 loans on those that they service until late April.

Put it this way. If every major servicer and lender followed Wells’ lead – and there are only a few others – HARP 2.0’s impact would be significantly limited. You would have to stay with your own servicer for your refi. And the servicer may not want to refinance you if you’re a current borrower, or they may offer you alternative products. The inability for the borrower to have flexibility, to shop around for the best rates, to use someone other than their current circumstance, will dampen the use of HARP, almost certainly. I’d guess that the total refi balance will end up, at the big 5 servicers, to be not much more than the $3 billion in refis they are obligated to perform under the foreclosure fraud settlement (and yes, HARP refis can apply to that, which means they get their Fannie and Freddie liability extinguished inside the settlement).

So we have yet another Administration housing program announced to much fanfare, whose ultimate result will disappoint. And the main reason for this is the discretionary nature of how the banks can use the programs. Deja vu all over again.

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David Dayen

David Dayen