The Broader Market

Housing and Urban Development Secretary Shaun Donovan talks about ways to restructure the Home Affordable Refinance Program (HARP), which was created shortly after President Obama took office. The idea behind HARP is to allow borrowers with mortgages that are greater than the value of the home that secures the loan - underwater borrowers - to refinance at today’s historically low rates.

In the abstract, HARP is a good idea given that home values throughout the United States have dropped precipitously since 2006. The only problem is that there has been limited uptake of the program on the part of both borrowers and lenders. On the borrower side, there are upfront costs to refinance and participate in HARP. These costs can be prohibitively expensive for people already cash constrained. Lenders have generally been reluctant to refinance borrowers who are severely underwater (those with loan to value ratios well beyond 105).

Curbing the costs to the borrower and creating a stronger incentive for lenders to participate is crucial if we are to increase uptake of the program. Given that reduced mortgage payments for those in most distress means more money in the pockets of people likely to spend it right away, HARP - if successful - could prove to be a great way to stimulate the economy. For this reason, it is encouraging to see that the administration is interested in reworking HARP to increase the number of participants in the program.