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House Democrats Call Out Administration on HARP 2.0

A group of over 50 House Democrats are calling out the Obama Administration for their management of the HARP 2.0 program. In a letter to Treasury Secretary Timothy Geithner and Acting Director of the Federal Housing Finance Agency Ed DeMarco, the Democrats, led by Rep. Maxine Waters, point to data showing that the new version of HARP, designed to steer more refinancing to underwater borrowers, simply isn’t meeting those goals.

The Obama Administration has been touting the HARP 2.0 changes as a way to unlock refinancing for borrowers who otherwise could not get it. However, only 21% of HARP loans in the first quarter of 2012 went to borrowers with loan-to-value ratios above 105%, according to Inside Mortgage Finance. This obvious outcome stems from the fact that banks have simply not implemented the changes to HARP in a way to facilitate underwater refis. The letter addresses how banks are either ignoring or gaming the system:

The participation of banks in HARP 2.0 is also a problem. According to the Federal Reserve’s April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, 70 percent of banks are either not actively soliciting HARP 2.0 applications or have participated very little in the program.

For the banks that are participating, many of them have added their own requirements on top of HARP 2.0 requirements that are either pushing otherwise qualified borrowers out of the program or forcing them to refinance at a higher price. For example, several major banks are not refinancing loans that they do not already service. This prevents homeowners from shopping around for the best price, a task that is essential since banks are charging higher than market rates for HARP 2.0 refis. According to one analysis, banks are charging between 3.5 and 7 points for HARP 2.0 loans, with some banks charging even more.

HUD Secretary Shaun Donovan acknowledged these issues in a conference call earlier this month, though he tried to downplay them. But it’s a known fact that, by limiting refinancing, banks are using HARP 2.0 to create an artificially confined market, where they can jack up interest rates for their own borrowers. Add to that the various closing costs and fees, and HARP 2.0 refis become very profitable for the banks, at the expense of their customers.

For some reason, several progressive groups are still pushing to extend these HARP 2.0 tweaks into the entire housing market – right now, only Fannie and Freddie-owned loans are using the new guidelines. So they’re ignoring the plain fact that, as these 52 House Democrats write, “HARP 2.0 is not serving the homeowners it was designed to serve.” The Administration counters that they have ways to increase competition on HARP 2.0 loans through a bill currently in the Senate, authored by Robert Menendez and Barbara Boxer. But Ed DeMarco has the ability to implement those kinds of measures right now and has not done so.

The House Democrats also highlighted a recent SIGTARP report on the failure of the Hardest Hit Fund, a Treasury Department program to provide relief to borrowers in the hardest hit states. It has paid out just 3% of its funding in two years. Treasury forced the states to bargain with banks and the GSEs for participation in the program, rather than using their own bargaining power.

I don’t expect much action out of this letter; if letters worked to spur change, we’d have a heck of a lot of change by now. But the recognition by Democrats of the failures of HARP 2.0 effectively ends any opportunity to expand that program any further. And it highlights the deficiencies in the program, which could actually be ameliorated without Congressional action.

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David Dayen

David Dayen