Harping on HARP

More than two years after the recession, many segments of the US economy are well out of recovery mode and into expansion, yet housing remains weak. Monday, the government stepped in (again) to attempt to help, releasing details of a second go-round for the Home Affordable Refinance Program (HARP).

With election season kicked off, it’s no shock politicians want to boast a concrete plan to “fix” housing, though this is by no means the current administration’s first go. HARP 1.0 was launched in March 2009 to help underwater homeowners refinance to lower-cost mortgages, in an effort to lower foreclosures and provide consumers a little extra flexibility. The program’s target was three million to four million refinances. To date, there’s been only 900,000—not exactly what officials hoped. Moreover, home prices have remained very weak, so many folks who’d like to refinance still can’t, despite government efforts seeking to buoy housing demand and, thus, prices (think 2009’s home purchase tax credits).

Hence, HARP 2.0 aims to roughly double the total refinances by lowering some of the barriers to participation. The loan-to-value ratio is now uncapped, meaning homeowners can refinance no matter how far their home value has fallen. Some fees are removed for borrowers who refinance into shorter-term mortgages. And property appraisal requirements are eliminated in cases where agencies’ automatic valuations are provided, removing the concern of a “put back” due to a faulty appraisal.

Will it work? Maybe, though our best guess is whatever benefit HARP 2.0 delivers could be at least matched—if not overshadowed—by the law of unintended consequences. Moreover, have politicians really figured out why HARP 1.0 didn’t work as hoped? After all, there are many reasons the first iteration wasn’t as successful as planned—some of which involve regulatory changes impacting competition among lenders or associated fees. (For example, anyone who’s tried to buy, sell or build a home in the past two years knows what a frustrating obstacle the relatively new Home Valuation Code of Conduct can be.)

This refinancing program is just the latest example of attempts to “help” homeowners and the housing market. Maybe if more homeowners can refinance, the pace of foreclosures—and the downstream price effect of banks liquidating those homes—slows. But history shows the more governments tinker with market pressures impacting prices, the less prices behave as desired. Whether that price is the cost of a home or a mortgage, the idea government intervention is all upside and a surefire success is a fallacy. Home prices already have numerous outside pressures, and we doubt HARP 2.0 will cure all that’s ailing housing.

Then again, what if we’re wrong and this is a rip-roaring success? (We certainly hope it is! We’re just tempering our expectations.) Well, in that case, some folks with underwater mortgages will, presumably, have an easier time affording their homes—no doubt a major benefit to them. And perhaps that frees up some of their disposable income for deployment elsewhere. But bear in mind, consumer spending has recovered just fine despite the weak housing market—it’s been logging new highs for months. Thus, an additional tailwind (if things work out as politicians hope) would likely be an incremental positive at best.

By the same token, consider that the economy has been expanding for eight quarters (most likely nine—stay tuned for the advance estimate of Q3 GDP on Thursday), corporate earnings and revenues have been strong, retail sales are at all-time highs and many other metrics are showing signs of strength and/or reacceleration. Simply put, in our view, the link many draw between housing and the economy overall is overstated. Thus, should HARP 2.0 be an abject failure—a possibility one must consider when talking about government manipulation of prices and behavior—the economic and capital markets impact is unlikely to be at all significant.