With disappointing results from his foreclosure rescue program and an election year on the horizon, President Obama last fall set his sights on refinancing, specifically helping borrowers who owe far more on their mortgages than their homes are currently worth.
The Home Affordable Refinance Program(HARP) kicked into gear at the beginning of this year and has been very popular, with some banks reporting its share at about 30 percent of all refinances.
The idea of HARP was not only to help underwater borrowers stay afloat with payments but also to put more money in their pockets, which in turn could serve as a wider economic stimulus. That’s all well and good when interest rates are hovering around record lows. Now, thanks to an improving economy, mortgage rates are rising.
"With the rate increase last week, refinances are obviously slowing, and the refinance share at 73 percent is down to its lowest level since last July,” said Jay Brinkmann, MBA's Senior Vice President of Research and Education. “With rate/term refinances falling as we go forward, HARP will be a bigger percentage of refinances but will be more concentrated in certain states," Brinkmann continued in today’s weekly mortgage application report.
The states that had the worst mortgage delinquencies will likely now see the highest share of HARP refinances, as they have the sharpest home price drops. In fact, it is already happening. Florida’s refis were up 49 percent in February month-to-month, Arizona up 61 percent and Nevada up 71 percent, according to the MBA. Refinances in the rest of the country were generally flat or down.
“HARP clearly is a driving force in those states that saw the most defaults and the biggest drops in home equity.”
Rates are still historically low, but so many borrowers have already refinanced at rates below 4 percent that anything above now seems comparatively high.
“As rates rise, the economics shift for the borrower. It makes refinancing less attractive,” says Jaret Seiberg of Guggenheim Partners. “In the short term it could lead to a spike in refinancing as borrowers rush to lock in rates before they go even higher,” he adds.
Most analysts say they do not expect rates to spike higher than 4.5 percent on the 30-year fixed, at least not this year, although some say they could head toward 5 percent in 2013.
"Even if mortgage rates rise as much as 50 basis points this year, most of the people looking to take advantage of the underwater refi programs would still benefit. By definition, we are talking about a pre-2009 group of borrowers and in many cases pre-2007 borrowers who have 5 1/2 percent or more mortgages. Most would be happy to save 100 basis points on a refi," says Guy Cecala of Inside Mortgage Finance. "The real test of the Refi programs, I believe, is whether they will actually get a lot more borrowers approved. The level of interest rates is to some extent, the least of the challenges."