oversight

Home Affordable Refinance Program A Mid-Program Assessment

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-08-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

           Federal Housing Finance Agency
               Office of Inspector General




Home Affordable Refinance Program
         A Mid-Program Assessment




Evaluation Report  EVL–2013–006  August 1, 2013
                 Home Affordable Refinance Program
                 Why OIG Did This Report
                 The Federal Housing Finance Agency (FHFA), in coordination with the U.S.
                 Department of the Treasury (Treasury), announced the Home Affordable
                 Refinance Program (HARP or program) in March 2009. HARP is a
                 streamlined refinance program for loans owned or guaranteed by Fannie Mae
Synopsis         or Freddie Mac (collectively, the Enterprises) that is designed to assist
                 borrowers who are current on their loans, but have not been able to refinance
   ———           because they have little or no equity in their homes.
                 FHFA Office of Inspector General (OIG) conducted this program evaluation to
August 1, 2013   assess FHFA’s administration and oversight of HARP.

                 What OIG Found
                 When HARP was announced in March 2009, Treasury and FHFA estimated
                 that four to five million borrowers would have the opportunity to refinance
                 under the program. As of September 2011, however, fewer than one million of
                 those borrowers had refinanced. Based on consultations with lenders and
                 feedback from borrowers, FHFA directed the Enterprises to modify the
                 program, which resulted in HARP 2.0. The program is currently scheduled to
                 expire on December 31, 2015.
                 As a result of the initial HARP 2.0 program modifications and subsequent
                 changes made throughout 2012 and 2013, HARP refinance volume has
                 substantially increased. As of March 2013, 2.4 million HARP refinances had
                 been completed. It is difficult, however, to project how many HARP-eligible
                 loans will ultimately be refinanced. Several unknown variables, including
                 interest rates, lender participation, and borrowers’ willingness to refinance,
                 make any estimate uncertain.
                 Today, impediments to the program’s success remain. Educating borrowers
                 and encouraging their participation continues to be a major challenge. FHFA is
                 planning to address this by implementing a nationwide public education
                 campaign.
TABLE OF CONTENTS ................................................................

TABLE OF CONTENTS .................................................................................................................3

ABBREVIATIONS .........................................................................................................................5

PREFACE ........................................................................................................................................6

CONTEXT .......................................................................................................................................7
      The Benefits and Obstacles of Refinancing a Mortgage ..........................................................7
      HARP ........................................................................................................................................8
              HARP 1.0 ..........................................................................................................................9
              HARP 2.0 ........................................................................................................................10

PROGRAM ASSESSMENT .........................................................................................................12
      1.     FHFA’s Administration of HARP ..................................................................................12
      Consulting with Stakeholders .................................................................................................12
              Stakeholder Meetings .....................................................................................................12
              Borrower Survey .............................................................................................................15
      FHFA Initiatives .....................................................................................................................15
              State-Level Programs ......................................................................................................15
              Nationwide HARP Education Campaign .......................................................................16
              FHFA Reporting and Website ........................................................................................16
      2.     Analysis of Performance Data and Program Outcomes .................................................17
      FHFA ......................................................................................................................................17
      Borrowers ...............................................................................................................................18
              Decrease in Monthly Mortgage Payments ......................................................................18
              Increase in High LTV Refinances ..................................................................................19
              Increase in Mortgage Stability ........................................................................................20
              Focus on Refinancing Primary Residences ....................................................................20
      Enterprises ..............................................................................................................................21
              Credit Risk Benefit .........................................................................................................21


                                            OIG  EVL–2013–006  August 1, 2013                                                                   3
             Guarantee Fee Benefit ....................................................................................................22
             Retained Portfolio Cost...................................................................................................22
             Representation and Warranty Relief Cost ......................................................................23
             Opportunity Cost.............................................................................................................24
      3.     Remaining Barriers .........................................................................................................24
      Borrower Challenges ..............................................................................................................24
             Borrower Knowledge ......................................................................................................24
             Origination Fees and Closing Costs................................................................................26
             Mortgage Insurance ........................................................................................................26
      Lender Challenges ..................................................................................................................27
      4.     The Future .......................................................................................................................28

CONCLUSION ..............................................................................................................................29

OBJECTIVE, SCOPE, AND METHODOLOGY .........................................................................30

ADDITIONAL INFORMATION AND COPIES .........................................................................32




                                           OIG  EVL–2013–006  August 1, 2013                                                                 4
ABBREVIATIONS .......................................................................

Enterprises           Fannie Mae and Freddie Mac

Fannie Mae            Federal National Mortgage Association

FHFA                  Federal Housing Finance Agency

Freddie Mac           Federal Home Loan Mortgage Corporation

G-Fee                 Guarantee Fee

HARP or program       Home Affordable Refinance Program

HERA                  Housing and Economic Recovery Act of 2008

HHF                   Hardest Hit Fund

LPMI                  Lender Paid Mortgage Insurance

LTV                   Loan-to-Value Ratio

MBS                   Mortgage-Backed Securities

OIG                   Federal Housing Finance Agency Office of Inspector General

Treasury              U.S. Department of the Treasury




                          OIG  EVL–2013–006  August 1, 2013                       5
PREFACE ...................................................................................

OIG was established by the Housing and Economic Recovery Act of 2008 (HERA),1
which amended the Inspector General Act of 1978.2 OIG is authorized to conduct audits,
investigations, and other studies of the programs and operations of FHFA; to recommend
policies that promote economy and efficiency in the administration of such programs and
operations; and to prevent and detect fraud and abuse in them.

This report provides an assessment of HARP, which is designed to assist borrowers who have
little or no equity in their homes to refinance their home loans, as long as they are current on
their mortgage payments. As of March 2013, more than 2.4 million homeowners have
obtained a HARP refinance.

This report was prepared by Alexa Strear, Investigative Counsel, and Brian Harris,
Investigative Counsel. OIG appreciates the assistance of FHFA, Fannie Mae, and Freddie
Mac staff in completing this report. It has been distributed to Congress, the Office of
Management and Budget, and others and will be posted on OIG’s website, www.fhfaoig.gov.




George F. Grob
Deputy Inspector General for Evaluations




1
    Pub. L. No. 110-289.
2
    Pub. L. No. 95-452.




                              OIG  EVL–2013–006  August 1, 2013                                  6
CONTEXT ..................................................................................

The Benefits and Obstacles of Refinancing a Mortgage

Refinancing a mortgage is a common practice for American home owners. The process
involves a borrower acquiring a new loan to pay off the original mortgage in full.3 This
releases the borrower from the terms of the original mortgage while binding the borrower to
the terms of the new one. Most residential mortgage contracts in the United States contain no
borrower prepayment penalty. Thus, at any time, a borrower has the option to prepay a
mortgage in full without penalty. Because refinancing a mortgage involves obtaining an
entirely new mortgage, however, the borrower is subject to many of the standard upfront costs
associated with any new mortgage. These costs are associated with a new appraisal,
origination fees, title search and insurance, attorney and settlement fees, and taxes.

There are several reasons a borrower may want to refinance a mortgage. A borrower may
wish to obtain a lower interest rate,4 reduce the aggregate monthly payment, obtain a different
amortization period, or change the mortgage product (e.g., move from an adjustable rate
mortgage to a fixed rate mortgage). A borrower’s incentive to refinance increases as interest
rates fall because the cost of borrowing money is reduced. Accordingly, the borrower’s
monthly housing payment can be decreased by refinancing to a mortgage with a lower interest
rate. For example, the United States experienced refinancing waves in 1992-1993, 1998, and
2001-2003. During each of those three time periods, interest rates fell more than two
percentage points.

There are certain environmental and borrower
variables that can make it more difficult to refinance a      The loan-to-value ratio
mortgage, including (1) tightened lending standards,          is calculated by dividing a
(2) poor borrower credit, and (3) changes in property         mortgage’s unpaid principal
values that reduce the borrower’s equity. Each of these       balance by the current market
                                                              value of the property securing
three obstacles has manifested itself as a result of the
                                                              the mortgage.
recent housing crisis, making it difficult for some
borrowers to take advantage of record-low interest
rates. For example, a traditional refinance of an Enterprise-owned mortgage requires a
borrower to have a maximum loan-to-value (LTV) ratio of 80%, unless the loan contains a
credit enhancement such as mortgage insurance. As home prices fell during the housing crisis,

3
 The term “borrower” in this report refers to a mortgagor – a person who has obtained a loan in exchange for a
security interest in the property.
4
    By borrowing at a lower interest rate, a borrower will pay less interest over the term of a loan.




                                       OIG  EVL–2013–006  August 1, 2013                                       7
homeowners lost a portion of the equity they once had in their homes. For many borrowers,
the lower home value left them with little remaining equity or, worse, underwater on their
mortgages.5 These highly leveraged borrowers are often unable to refinance their loans
through conventional means, even if they have good credit and are paying their mortgages
timely.

HARP

In March 2009, FHFA, in conjunction with Treasury, announced HARP. HARP is a
streamlined refinance program for loans owned or guaranteed by the Enterprises that is
designed to assist borrowers who (1) have little or no equity in their homes, and (2) are
current on their monthly mortgage payments. To qualify for this streamlined refinance
opportunity, a borrower must satisfy a variety of eligibility requirements, which have changed
several times during the program’s history. Figure 1 outlines today’s eligibility criteria.

                              FIGURE 1. HARP-ELIGIBILITY CRITERIA AS OF JUNE 2013

         Loan Requirements                Borrower Requirements                  Result Requirements

       Current LTV must be             Borrower must be current on       HARP refinance must result in at
        greater than 80%                 the mortgage payments at the       least one of the following benefits
       Loan must be owned or            time of the refinance              to the borrower:
        guaranteed by the               Borrower has had no late            A reduction in the borrower’s
        Enterprises                      payments on the mortgage in           monthly principal and interest
       Loan must have been              the past 6 months                     payment
        delivered to the                Borrower has had no more            A reduction in the borrower’s
        Enterprises on or before         than one late payment on the          interest rate
        May 31, 2009                     mortgage in the past 12             A reduction in the amortization
       Loan must be a first lien        months                                term
                                        Borrower has not previously         A conversion to a more stable
                                         refinanced under HARP                 mortgage product


In addition to allowing HARP-eligible borrowers to take advantage of historically low interest
rates, the program allows them to refinance into mortgages that may lower their monthly
mortgage payments, move them to more stable mortgages, or shorten their mortgage terms to
build equity faster. By helping this subset of borrowers refinance into mortgages with more
favorable terms, FHFA hopes to reduce the risk of future defaults.



5
 A mortgage is considered underwater if the borrower owes the lender more than the market price of the
home.




                                        OIG  EVL–2013–006  August 1, 2013                                       8
To establish HARP, FHFA directed the Enterprises to define specific eligibility requirements
and to implement the program. However, as secondary market participants, the Enterprises
do not directly lend to borrowers. Thus, a HARP-eligible borrower must refinance with a
mortgage lender in the primary market to participate in the program. Because neither FHFA
nor the Enterprises have the authority to require lenders to originate loans, lender participation
in HARP is entirely voluntary. Nevertheless, by directing the Enterprises to implement
HARP, FHFA is seeking to create a lending environment in which HARP-eligible borrowers
are able to obtain financing from lenders.6

       HARP 1.0

When HARP 1.0 was announced, Treasury and FHFA estimated that four to five million
borrowers would have the opportunity to refinance under the program.7 This estimate
represented the number of borrowers who were eligible for a HARP 1.0 refinance at that time.

By September 2011, however, 987,910 borrowers had completed HARP 1.0 refinances.
FHFA, the Enterprises, lenders, and other stakeholders identified several issues with HARP
1.0 that were causing this lackluster result. Among them were:

          Loans with LTVs greater than 125% were not eligible for HARP 1.0 refinances;
          The short program duration of approximately 15 months discouraged lenders from
           investing resources to market and originate
           HARP loans;                                      Representations and
          The risk of representation and warranty                   warranties are assurances that
                                                                     lenders make to the Enterprises
           liability deterred lender originations;
                                                                     about the quality of loans being
          Manual property appraisals were required for              purchased or guaranteed by
           the majority of HARP 1.0 originations;                    the Enterprises. If an Enterprise
                                                                     determines that a loan does
          Lenders were not permitted to solicit directly            not meet the criteria that the
           HARP-eligible borrowers for refinancing; and              lender claimed the loan met,
                                                                     then the Enterprise may issue a
          Risk-based fees increased up-front borrower
                                                                     request to the lender to
           costs and diminished the benefit of a lower               repurchase the loan.
           interest rate.



6
    Detailed reasons for lender participation are described below.
7
 The term “HARP 1.0” refers to the Home Affordable Refinance Program between April 2009 and October
2011. The term “HARP 2.0” refers to the Home Affordable Refinance Program from November 2011 to the
present. The term “HARP” refers to the Home Affordable Refinance Program in its entirety.




                                      OIG  EVL–2013–006  August 1, 2013                                9
Accordingly, FHFA directed the Enterprises to collaborate with stakeholders to address these
concerns and improve the program. After several modifications were agreed upon, FHFA
publicly announced them in October 2011, rebranding the program as HARP 2.0.

    HARP 2.0

    a. October 2011 Modifications

FHFA’s initial HARP 2.0 modifications incorporated five important changes to the HARP-
eligibility criteria. First, FHFA and the Enterprises removed the 125% LTV ceiling. This
expanded the HARP-eligible population to include seriously underwater borrowers. Second,
FHFA extended HARP’s duration by 18 months. This extension was intended to increase
lender participation. Third, the Enterprises eliminated the manual property appraisal
requirement.8 This helped streamline the refinancing process and reduced borrower costs.
Fourth, the Enterprises lowered the maximum amount of risk-based fees.9 And fifth, the
Enterprises revised lender solicitation guidelines and permitted lenders to offer additional
incentives to borrowers.

    b. 2012 and 2013 Modifications

After receiving feedback from stakeholders, FHFA and the Enterprises announced several
additional changes to HARP 2.0 in 2012 and 2013. To incentivize lender participation, the
Enterprises (1) granted substantial representation and warranty relief for certain HARP
refinances, and (2) reduced documentation requirements. Additionally, FHFA extended
HARP an additional two years – the program is now scheduled to end on December 31, 2015.




8
  A manual property appraisal is not necessary if the Enterprises’ automated valuation models can provide a
reliable valuation. Automated valuation models are statistically based programs that use information such as
comparable home sales, property characteristics, tax assessments, and price trends to provide an estimate of
value for a specific property. Each Enterprise has its own proprietary automated valuation model.
9
  Risk-based fees, also referred to as “loan level price adjustments” or “delivery fees,” are fees the Enterprises
charge lenders based on higher-risk loan characteristics, such as low credit scores, high LTVs, or limited
income and asset documentation.




                                     OIG  EVL–2013–006  August 1, 2013                                             10
                                   FIGURE 2. HARP TIMELINE

    2009
•March 4:       FHFA announced the Home Affordable Refinance Program
•July 1:        FHFA raised the HARP-eligible LTV ceiling from 105% to 125%

    2010
•March 1:       FHFA extended HARP's end date from June 10, 2010, to June 30, 2011

    2011
•March 11:      FHFA extended HARP's end date from June 30, 2011, to June 30, 2012
•August 19:     FHFA directed the Enterprises to collaborate with stakeholders to improve HARP 1.0
•October 24:    FHFA publicly announced HARP 2.0; FHFA extended HARP's end date from June 30,
                2012, to December 31, 2013

    2012
•September 11: FHFA announced additional representation and warranty relief for HARP 2.0 loans
•September 14: The Enterprises announced changes to the income and asset documentation
               requirements for HARP 2.0 loans

    2013
•March 19:      FHFA announced that it will implement a nationwide HARP education campaign
•April 11:      FHFA extended HARP's end date from December 31, 2013, to December 31, 2015




                            OIG  EVL–2013–006  August 1, 2013                                      11
PROGRAM ASSESSMENT ..........................................................

OIG assessed HARP by (1) examining FHFA’s administration of the program, (2) analyzing
performance data and program outcomes, and (3) identifying the remaining program barriers.

1. FHFA’s Administration of HARP

As indicated above, HARP 1.0 produced less than anticipated results. After approximately
two and one-half years, fewer than one million of the four to five million HARP-eligible loans
had been refinanced. Consequently, FHFA acted to improve the program by collecting and
implementing stakeholder feedback, and establishing other initiatives.

Consulting with Stakeholders

FHFA actively engaged with stakeholders to identify and address problems with HARP. To
capture the perspective of those involved in the lending process, FHFA facilitated meetings
among the Enterprises, lenders, and mortgage insurers. To understand the issues facing
borrowers, Fannie Mae conducted a comprehensive survey of HARP-eligible borrowers in
2012; the results of this survey were shared with FHFA.

   Stakeholder Meetings

As indicated above, lenders and mortgage insurers are stakeholders whose voluntary
participation is necessary for HARP to be successful. Without lender participation, borrowers
cannot secure HARP refinances. Additionally, because there are special mortgage insurance
requirements for HARP loans, the participation of mortgage insurers is also important.
Working with lenders, FHFA and the Enterprises identified several barriers to lender
participation during HARP 1.0. For example, many lenders established additional HARP-
eligibility standards above and beyond those required by the Enterprises. This resulted in
fewer refinances as well as borrower confusion about HARP eligibility.

Beginning with HARP 2.0, FHFA started facilitating
regular meetings among the Enterprises, lenders, and          A same servicer refinance
mortgage insurers. At these meetings, stakeholders share      refers to a borrower
                                                              refinancing a loan with the
concerns and constructive criticism about HARP. After
                                                              current servicer. A new
receiving feedback from lenders, FHFA and the                 lender refinance refers to a
Enterprises decided to modify HARP. The changes               borrower obtaining a loan
included (1) providing representation and warranty relief     from a third-party lender that
for certain loans, (2) reducing documentation                 does not currently service the
requirements, (3) aligning same servicer and new              borrower’s loan.
lender requirements, and (4) aligning Fannie Mae’s and


                              OIG  EVL–2013–006  August 1, 2013                                12
Freddie Mac’s HARP guidelines. These changes were made to increase lender participation
and enhance borrower understanding of the program.

Reducing Lender Representation and Warranty Exposure. During HARP’s infancy, lenders
were hesitant to participate in the program because the new loans could expose them to new
representation and warranty liability. This was an issue for both new lenders and same
servicers. New lenders declined to refinance HARP-eligible loans because they did not want
the representation and warranty liability for new, high-LTV loans. Moreover, same servicers
declined to refinance HARP-eligible loans because they preferred to keep the representation
and warranty risk associated with the original loan.10

To reduce their representation and warranty exposure,
lenders imposed a variety of credit and process                             Credit and process overlays
overlays. These overlays, in effect, prevented higher-                      are additional criteria that
                                                                            lenders impose on top of
risk HARP-eligible borrowers from refinancing with
                                                                            the Enterprises’ HARP
those lenders. Thus, lenders restricted HARP refinances                     requirements, including
to lower-risk borrowers who exposed them to less                            lower LTV ratios, higher
representation and warranty risk. For example, some                         credit scores, or greater
lenders declined to refinance loans with LTVs greater                       documentation requirements.
than 105% or loans that they did not currently service.

FHFA and the Enterprises addressed this issue by waiving certain representations and
warranties for HARP refinances. In November 2011, the Enterprises relieved certain
representations and warranties associated with the original loan for same servicer refinances.
Despite this modification, lenders continued to communicate to FHFA and the Enterprises
that representation and warranty liability was an impediment to their participation.
Consequently, in September 2012, FHFA directed the Enterprises to relieve all HARP lenders
of liability for the following:

        Representations and warranties associated with the original loan; and



10
  The Enterprises generally review loans that default within the first two years of origination for violations
of representations and warranties. If a representation and warranty violation is found, the Enterprises require
the servicer to repurchase the mortgage. Historically, the Enterprises did not review as many loans that
defaulted more than two years after origination for breaches of representations and warranties because they
assumed that those loans defaulted for reasons unrelated to violations of representations and warranties
(e.g., unemployment). As a result, servicers believed that it was better to keep a loan that had a good payment
history for several years rather than replace it with a new loan that could default within two years, and thereby
unnecessarily expose the servicer to a review of the loan by the Enterprise and possible repurchase request. In
September 2012, the Enterprises announced that they were changing their process for reviewing loans for
breaches of representations and warranties.




                                    OIG  EVL–2013–006  August 1, 2013                                             13
        Representations and warranties associated with the new loan regarding (1) standard
         eligibility and underwriting; and (2) the value, condition, and marketability of the
         mortgaged property.11

Reducing Documentation. Lenders informed FHFA and the Enterprises that HARP borrower
documentation requirements were overly burdensome and did not substantially improve
underwriting. Consequently, the Enterprises generally reduced the income and asset
documentation requirements, which improved lender efficiency. For example, prior to these
modifications, lenders were in some cases required to collect two years of a borrower’s
income history to establish stability and continuity. Today, lenders are not required to collect
such documentation, which helps lenders streamline the refinance process.

Aligning Same Servicer Refinances and New Lender Refinances. Through stakeholder
meetings and data collection, FHFA found that same servicer refinances outnumbered new
lender refinances. This was attributable to external factors such as lenders focusing on
refinancing loans for which they already had underwriting data. However, as lenders began to
exhaust their own HARP-eligible loans, FHFA wanted to encourage them to solicit HARP-
eligible borrowers outside of the pool of loans they currently service. To facilitate this, FHFA
and the Enterprises have generally aligned the same servicer and new lender HARP
requirements.12

Aligning Fannie Mae and Freddie Mac. FHFA has
worked to narrow the differences between the                     Refinance proceeds refers
Enterprises’ HARP programs. Initially, Fannie Mae and            to the money the borrower
Freddie Mac developed and implemented HARP within                receives to pay off the original
their own companies. This created differences between            loan.
their programs, both substantively and procedurally,
which made HARP refinancing more complicated for lenders. FHFA worked with the
Enterprises to reduce these differences by aligning the majority of their HARP guidelines.
Today, the Enterprises’ policies differ in one significant respect – the borrower’s option to
add closing costs to the loan’s principal balance. Freddie Mac limits the amount of refinance
proceeds that can be used for closing costs to the lesser of 4% of the current unpaid principal

11
  The representation and warranty relief for new HARP loans applies if a borrower has an acceptable payment
history. An acceptable payment history means the borrower has not been 30 days delinquent during the first 12
months following the date that the Enterprise acquires the HARP loan. Borrowers satisfy this requirement in
the vast majority of HARP refinances.
12
  Today, one distinct process difference – income verification requirements – remains between same servicer
and new lender refinances. Generally, same servicers are required to verbally verify a borrower’s source of
income, whereas new lenders are required to obtain documentation to verify the borrower’s source of income.
This process difference exists because same servicers have an informational advantage over new lenders, such
as access to the borrower’s original loan file and mortgage payment history.




                                   OIG  EVL–2013–006  August 1, 2013                                          14
balance of the original loan or $5,000; Fannie Mae does not limit the borrower’s use
of refinance proceeds for closing costs.

     Borrower Survey

There are a number of borrowers who are eligible for HARP but who have not refinanced.
Fannie Mae conducted a survey of these borrowers and borrowers who have completed a
HARP refinance. The objective of the survey was to understand (1) why borrowers are not
taking advantage of HARP, (2) the role that servicers and lenders play in encouraging HARP-
eligible borrowers to refinance, and (3) which solicitation techniques and incentives impact
borrowers’ willingness to refinance. Fannie Mae made three key findings:

        Some HARP-eligible borrowers, especially high-LTV borrowers, are not refinancing
         because they do not think they qualify;
        Current servicers are best situated to encourage HARP-eligible borrowers to refinance
         because these servicers are the borrowers’ point of contact; and
        HARP-eligible borrowers may be encouraged to refinance if offered incentives.

Fannie Mae shared the results of its survey with FHFA. FHFA should use the findings in this
survey when designing and deploying its nationwide HARP education campaign.13

FHFA Initiatives

     State-Level Programs

FHFA is seeking to increase HARP refinance volume
by pursuing state-level support for the program. For              Refinance volume refers to
example, FHFA is working with state housing finance               the number of completed
agencies that receive funds from Treasury’s Hardest Hit           HARP refinances.
Fund (HHF).14 FHFA has worked with agencies in
Arizona and Nevada to allocate a portion of their HHF funds to support HARP refinances.15
Also, at the state level, Michigan allocated $5 million that it received from the National


13
  OIG reviewed borrower complaints made to OIG, to FHFA, and to federal, state, and local law enforcement
agencies about HARP and found that the complaints were consistent with Fannie Mae’s survey findings.
14
   The HHF provides funding to certain state housing finance agencies to help prevent foreclosures and
stabilize housing markets.
15
  The Enterprises’ HARP guidelines permit borrowers to use HHF funds to pay down the existing unpaid
principal balance or to pay closing costs for HARP refinanced loans as long as the borrower does not have to
repay the state agency.




                                   OIG  EVL–2013–006  August 1, 2013                                         15
Mortgage Settlement to assist borrowers with HARP refinances.16 As a result of these efforts,
HARP-eligible borrowers are receiving funds that they may otherwise not have; this extra
incentive may be the deciding factor in a borrower’s decision to take advantage of HARP and
refinance.

       Nationwide HARP Education Campaign

In March 2013, FHFA announced that it will be implementing a nationwide public relations
campaign to educate borrowers about HARP. This announcement was made in conjunction
with FHFA’s decision to extend HARP through the end of 2015. The campaign is specifically
intended to address the borrower misconceptions that Fannie Mae identified in its borrower
survey. FHFA has hired a public relations firm to coordinate and implement the campaign.

       FHFA Reporting and Website

FHFA collects refinance data from the Enterprises and publishes monthly refinance reports,
which are available to the public. The reports include an overview of HARP as well as certain
performance metrics. The analysis in these reports is primarily based on the number of HARP
refinances completed during that particular month.

To put these data in better perspective, however, FHFA
could compare the number of HARP refinances                            Pull-through rate is the
completed in a month to the total number of HARP-                      number of HARP refinances
eligible mortgages remaining at the end of the prior                   completed divided by the
month. The ratio of these two numbers is referred to as                total number of HARP-eligible
                                                                       loans for a given time period.
the pull-through rate. Both Enterprises keep these data
and analyze them regularly. Although FHFA has access
to these data, it has not released these figures to the public.

FHFA also maintains information about HARP on its website; however, the information is
limited and disorganized.17 The HARP-related textbox on FHFA’s homepage does not
describe what HARP is or how borrowers can benefit from it. For additional information, the
textbox directs readers to three external websites before linking them to FHFA’s HARP
webpage.

Similar to the homepage, FHFA’s HARP webpage lacks important details about HARP. For
example, it does not describe the basic eligibility requirements. Rather, it is a compilation of

16
  Michigan borrowers who are approved for a HARP refinance may be eligible to receive $500 to be applied
toward closing costs.
17
     Accessed on July 18, 2013.




                                  OIG  EVL–2013–006  August 1, 2013                                      16
links to FHFA press releases and external websites. As of July 18, 2013, two of the eight
bulleted links were broken and another two links were intended for lenders.

2. Analysis of Performance Data and Program Outcomes

OIG collected various data to measure HARP’s performance to date. The following sections
contain an analysis of this data, detailing program outcomes from several different
perspectives.

FHFA

The primary metric FHFA uses to measure the success of HARP is volume. When FHFA
announced HARP 2.0 in October 2011, lenders had completed 987,910 HARP refinances –
the majority of which were for loans with LTVs between 80% and 105%. Thus, more than
two years into the program, only a fraction of the four to five million HARP-eligible
borrowers had refinanced. When FHFA announced HARP 2.0, it projected that the changes
to the program would approximately double the refinance volume to a total of 1.9 million by
the program’s end date of December 31, 2013.

During the first two quarters of 2012, lenders began to implement the HARP 2.0 changes. The
impact of these changes began to show immediately. The HARP monthly refinance volume
started to increase beginning in January 2012 (see Figure 3). As of March 2013, lenders had
completed 2,459,329 HARP refinances – 58% of which were completed under HARP 2.0.18
This exceeds the goal of 1.9 million refinances set by FHFA in October 2011.




18
 Fannie Mae has completed 1,431,927 refinances – 60% of which were completed under HARP 2.0. Freddie
Mac has completed 1,027,402 refinances – 56% of which were completed under HARP 2.0.




                                OIG  EVL–2013–006  August 1, 2013                                    17
                              FIGURE 3. TOTAL HARP REFINANCES BY MONTH19

     140,000

     120,000

     100,000

      80,000

      60,000

      40,000

      20,000

          0




Moreover, FHFA incorporates HARP volume in its Annual Performance Plans as one
measure of its strategic goal to preserve and conserve the Enterprises’ assets. FHFA’s
FY2012 goal was to have HARP refinances account for at least 10% of all refinances during
that period. FHFA exceeded this goal – HARP refinances accounted for 18% of all Enterprise
refinances in FY2012. FHFA’s FY2013 goal is to complete 600,000 HARP refinances during
that time period. During the first six months of the fiscal year, 591,769 HARP refinances have
been completed, which puts FHFA on pace to surpass its FY2013 goal.

Borrowers

In addition to considering HARP volume, OIG requested HARP data from the Enterprises to
understand various borrower-focused program outcomes.

       Decrease in Monthly Mortgage Payments

The average borrower’s monthly savings that results from a HARP refinance is an important
outcome. By lowering the borrower’s monthly principal and interest payments, HARP
reduces the risk of future default and potentially stimulates the economy. According to Fannie
Mae’s 2012 data, HARP borrowers saved on average over $250 per month, or $3,000 per
year.20


19
     Source: FHFA, Fannie Mae, and Freddie Mac.
20
 Not all HARP loans result in lower monthly mortgage payments. For example, a borrower may increase the
monthly mortgage payment by refinancing into a loan with a shorter amortization period to build equity faster.




                                   OIG  EVL–2013–006  August 1, 2013                                           18
                                    FIGURE 4. AVERAGE MONTHLY SAVINGS

                                           Program                              Outcome

               Borrower's           Lender Completes     Borrower's New      Average Monthly
              Original Loan         a HARP Refinance       HARP Loan          Savings = $250




       Increase in High LTV Refinances

Prior to HARP 2.0, the refinance volume for loans with LTVs greater than 105% was
relatively small. To address this, FHFA directed the Enterprises to make two important
changes: (1) remove the 125% LTV ceiling, and (2) relieve lenders of significant
representation and warranty liability.

Figure 5 illustrates the effect these changes had on high-LTV loans. As lenders began to
implement these changes in early 2012, refinance volume for loans with LTVs between 105%
and 125% began to increase. Then, in June 2012, the Enterprises permitted lenders to deliver
HARP loans with LTVs greater than 125% into special mortgage-backed securities (MBS);
immediately thereafter, refinance volume for these loans dramatically increased.

                       FIGURE 5. HARP REFINANCES BY LTV: INCEPTION TO MARCH 201321

140,000

120,000                       LTV > 80% - 105%

100,000                       LTV 105% - 125%
                              LTV > 125%
     80,000

     60,000

     40,000

     20,000

         0




21
     Source: FHFA, Fannie Mae, and Freddie Mac.




                                       OIG  EVL–2013–006  August 1, 2013                     19
       Increase in Mortgage Stability22

HARP was also designed to place
borrowers in more stable mortgage          FIGURE 6. FANNIE MAE HARP REFINANCES BY MORTGAGE
                                                PRODUCT TYPE: JANUARY TO DECEMBER 201222
products (e.g., 30-year fixed rate
mortgages) or, if possible,                               0.5%
shorten their loan terms to build
equity faster. As shown in
                                              23.5%                   Fixed Rate Mortgages > 20 yrs
Figure 6, over 75% of HARP
borrowers refinanced into fixed                                       Fixed Rate Mortgages ≤ 20 yrs
rate mortgages with terms
                                                                      Adjustable Rate Mortgages
greater than 20 years, whereas                       76.0%
less than 1% of borrowers
refinanced into less stable
adjustable rate mortgages. Further, a significant percentage of borrowers chose to refinance
into fixed rate mortgages with terms of 20 years or less, which allows them to build equity in
their homes faster.

       Focus on Refinancing Primary Residences23

HARP refinances are not limited to                FIGURE 7. HARP REFINANCES BY OCCUPANCY TYPE:
primary residences; both second                             INCEPTION TO MARCH 201323
homes and investment properties are
HARP-eligible if they meet all the                   3%
other HARP criteria.24 As shown in                           10%
Figure 7, however, the majority of
                                                                                        Primary Residence
HARP refinances are for primary
owner-occupied residences. This is                                                      Second Home
due, in part, to lenders prioritizing                           87%                     Investment Property
the refinancing of primary
residences before secondary homes
and investment properties.




22
  Source: Fannie Mae. Freddie Mac data reveal a similar trend. Note that the Enterprises only permit
borrowers with LTVs less than 105% to refinance into an adjustable rate mortgage.
23
 Source: FHFA, Refinance Report: March 2013, at 4 (June 12, 2013) (online at
www.fhfa.gov/webfiles/25318/March2013RefinanceReport.pdf).
24
     Both second homes and investment properties have been HARP-eligible from the program’s inception.




                                    OIG  EVL–2013–006  August 1, 2013                                       20
Enterprises

As the regulator and conservator of the Enterprises, FHFA is responsible for stabilizing the
mortgage market while simultaneously conserving the Enterprises’ assets. These two
mandates create an inherent tension.25 FHFA established HARP in the wake of the housing
crisis as a public policy program. Yet, the program also affects the Enterprises financially.
FHFA has expressed that HARP’s financial impact on the Enterprises is a secondary
consideration to the program’s success. This, however, raises an important question regarding
the conservatorship: what is the potential cost of HARP to the Enterprises and, ultimately, to
taxpayers?26

This section explores HARP’s financial impact on the Enterprises. The net impact is primarily
a function of five variables:

          Credit risk
          Guarantee fees
          Retained portfolio investments
          Representation and warranty relief
          Opportunity cost

These variables are individually examined below. Because of the influence of numerous
economic and market forces on these variables, their impact can only be approximated at
best.27 However, OIG has reached several general conclusions about these variables.

       Credit Risk Benefit

The credit risk associated with a loan indicates the
likelihood of credit losses to the Enterprises as a result    Credit risk refers to the risk
of the loan’s default. Therefore, loans with a high           that a borrower will default on
                                                              the mortgage.
credit risk are likely to result in more credit losses
than loans with a low credit risk. The Enterprises
model a loan’s credit risk as a function of the borrower’s credit profile, the loan’s LTV, the

25
  See OIG, White Paper: FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and
Freddie Mac, at 28-29 (WPR-2012-001) (Mar. 28, 2012) (online at www.fhfaoig.gov/Content/Files/WPR-
2012-001.pdf).
26
  For a detailed analysis of the relationship between the Enterprises and taxpayers, see OIG, Analysis of the
2012 Amendments to the Senior Preferred Stock Purchase Agreements (WPR-2013-002) (Mar. 20, 2013)
(online at www.fhfaoig.gov/Content/Files/WPR-2013-002_2.pdf).
27
     Quantifying an estimate through economic modeling is beyond the scope of this evaluation.




                                     OIG  EVL–2013–006  August 1, 2013                                        21
presence of mortgage insurance, the amount of loan documentation, the mortgage product
(e.g., adjustable rate or fixed rate mortgage), the occupancy type, and local and regional
economic conditions.

The credit risk associated with a HARP loan is intuitively lower than the credit risk associated
with its original counterpart. In other words, a HARP borrower is less likely to default on the
new mortgage than on the original mortgage. This flows from the fact that the new mortgage
has, at a minimum, a lower interest rate, a lower monthly payment, or a shorter amortization
term than the original loan. Additionally, the original loan may have been refinanced into a
more stable mortgage product, which also reduces its risk of default. Consequently, the
Enterprises anticipate that new HARP loans will perform better, on the whole, than the
original loans would have, thereby reducing future credit losses.28 In this respect, the
Enterprises financially benefit from HARP.

     Guarantee Fee Benefit

In exchange for guaranteeing the payment of a loan’s principal and interest to MBS investors,
the Enterprises charge a guarantee fee (g-fee). Today, the Enterprises’ average g-fee to insure
a loan is higher than it was prior to 2009. In other words, the Enterprises charge a greater
premium to insure MBS today than they did before the housing crisis.

Just as a borrower is released from the terms of the original loan during a refinance, the
Enterprises are likewise released from the original g-fee structure. After the borrower
refinances, the Enterprises can securitize the refinanced loan and charge today’s higher g-fee.
Thus, the Enterprises realize a financial benefit in the difference between the g-fee associated
with the original loan and the g-fee associated with the new loan.

     Retained Portfolio Cost

HARP refinances negatively impact the Enterprises’
retained portfolios. As part of their business models,                    Prepayment risk refers to
the Enterprises buy and hold individual mortgages and                     the risk that the underlying
                                                                          mortgage will be paid off early
MBS to earn interest income. These portfolios of
                                                                          resulting in less interest income
mortgages and MBS are referred to as the Enterprises’
                                                                          for the holder of the debt.
retained portfolios. In addition to credit risk, the
retained portfolios expose the Enterprises to
prepayment risk.

28
  The net effect of adding origination fees to the new loan’s balance is negligible. In the case of default, the
Enterprises will be exposed to greater credit losses. However, if the borrower does not default, the loan is more
valuable because of the greater loan balance.




                                    OIG  EVL–2013–006  August 1, 2013                                             22
The Enterprises’ retained portfolios include HARP-eligible mortgages. When these mortgages
are refinanced (i.e., prepaid), the Enterprises no longer receive the interest payments on the
original loan. Then, the Enterprises purchase or guarantee the new loan that is issued at a
lower interest rate than the original loan and, thus, is less valuable. The effective cost to the
Enterprises is the difference in value that is derived from the net interest rate spread between
the original loans and the new loans.

     Representation and Warranty Relief Cost

As noted above, lenders provide certain representations and warranties regarding the integrity
of loans when they sell them to the Enterprises. If Fannie Mae or Freddie Mac discovers that
a lender has breached any of these representations or warranties, it can request the lender to
repurchase the loan. Over the previous two years, the Enterprises have received a significant
amount of money from lenders repurchasing defective loans that were sold to the Enterprises
prior to 2009.29

To encourage lenders to participate in HARP, FHFA directed the Enterprises to waive
significant representation and warranty protection for all HARP refinances.30 Therefore, if the
Enterprises do not identify a defect in the original loan prior to the HARP refinance, they will
likely be unable to pursue a repurchase.31 In this situation, the Enterprises retain the loan’s
credit risk, which would otherwise be returned to the original lender. Consequently,
representation and warranty relief associated with HARP may negatively impact the
Enterprises financially. In its 2012 public filings, Freddie Mac raised this concern.

HARP-eligible loans, however, are seasoned loans made to borrowers who have demonstrated
their ability and commitment to repay their mortgages.32 Typically, the Enterprises detect
a loan’s representation and warranty defects within the first three years of its delivery.
Therefore, the actual cost of eliminating the representations and warranties on HARP-eligible
loans is mitigated by their loan characteristics.

29
  For example, in January 2013, Bank of America paid Fannie Mae $3.6 billion and repurchased $6.6 billion
of loans to settle outstanding repurchase requests for loans originated from 2000 to 2008.
30
  As discussed above, both same servicers and new lenders are relieved of representations and warranties for
the original mortgage and the new HARP mortgage if certain criteria are met. Note that lenders are not relieved
of representations and warranties related to the Enterprises’ charters; misstatements, misrepresentations,
omissions, or data inaccuracies; clear title and enforceable first lien position; compliance with applicable laws;
and salability of the mortgage to the Enterprise.
31
  If a borrower becomes more than 30 days delinquent within the first 12 months of an Enterprise acquiring
the refinanced loan, that Enterprise has the right to pursue all of the representations and warranties for the
HARP loan.
32
  To qualify for HARP, the borrower must be current on the mortgage at the time of the refinance, with no late
payment in the past 6 months and no more than 1 late payment in the past 12 months.




                                    OIG  EVL–2013–006  August 1, 2013                                              23
     Opportunity Cost

If HARP did not exist, it is conceivable that some HARP-eligible borrowers would
conventionally refinance their loans. In this scenario, the borrower would have to acquire
additional mortgage insurance or add a sufficient amount of equity for the loan to be
Enterprise-eligible.33 This would reduce the Enterprises’ exposure to credit losses from a
borrower default. Additionally, it is conceivable that the new loan would not be purchased or
guaranteed by the Enterprises, thereby relieving them of all credit risk formerly associated
with that loan.

With HARP, however, there is no need for HARP-eligible borrowers to acquire additional
mortgage insurance or add equity. Moreover, all HARP refinances are subsequently
purchased or guaranteed by the Enterprises. Thus, because HARP exists, the Enterprises
forego the opportunity to (1) reduce their credit risk through additional borrower credit
enhancements, or (2) relieve themselves of the loan entirely.

3. Remaining Barriers

Despite the modifications that FHFA has instituted throughout HARP, OIG has identified
several remaining program barriers.

Borrower Challenges

     Borrower Knowledge

OIG found that borrower knowledge and understanding of HARP remains a critical barrier to
the program. This is because many borrowers have not heard of the program, confuse the
program with other government housing programs, or do not realize that they are eligible.

Under HARP 1.0, borrowers were rejected by lenders for various reasons that contribute to
today’s confusion. Lenders turned borrowers away because of credit and process overlays and
capacity constraints.34 This left many borrowers frustrated or under the mistaken impression
that they were ineligible for HARP. Additionally, borrowers may not be aware that they are
permitted to refinance their mortgages with any participating lender.



33
 The Enterprises’ charters generally prohibit them from purchasing first lien single-family mortgages if the
LTV is greater than 80% unless there is some type of credit enhancement, such as mortgage insurance.
34
  It is the lender’s prerogative to establish credit and process overlays. Thus, if HARP-eligible borrowers are
turned down by one lender due to an eligibility overlay, then those borrowers may think that they are not
HARP eligible.




                                    OIG  EVL–2013–006  August 1, 2013                                           24
As a result of the changes to HARP implemented throughout 2011, 2012, and 2013, lenders
have largely removed their credit and process overlays and increased their capacity. However,
the challenge of educating borrowers about HARP eligibility and lender options remains,
especially for reaching borrowers who previously tried to refinance under HARP 1.0 and were
denied.

FHFA and the Enterprises have acknowledged that borrower outreach is critical to increasing
HARP refinances. Prior to HARP 2.0, lenders were prohibited from directly soliciting
borrowers with HARP-eligible loans for refinancing. To improve borrower knowledge of
the program and encourage borrowers to refinance, FHFA and the Enterprises revised the
solicitation guidelines for HARP loans. Lenders are now generally permitted to actively
contact HARP-eligible borrowers and have been aggressively sending HARP solicitations to
them.

Despite lenders’ solicitation efforts, some HARP-eligible borrowers do not respond to
solicitations because they are not familiar with the lender or believe their underwater loan
does not qualify for HARP. To address this issue, lenders are permitted to co-brand
solicitation materials with the Enterprises’ names and a lender’s name to strengthen lender
credibility among borrowers. Fannie Mae has also been designing solicitation templates and
marketing materials for lenders to send to HARP-eligible borrowers. In addition to informing
borrowers that they may potentially be eligible for a HARP refinance, the materials provide
illustrations of the benefits of HARP. For example, the materials illustrate that one of the
potential benefits is a reduction in borrowers’ monthly principal and interest payments. Also,
the Enterprises have continued to add and update HARP content on their websites with
information specifically targeted at informing borrowers about HARP. This includes
answering basic questions about HARP, providing eligibility criteria, and listing participating
lenders. As of the date of this assessment, more than 250 servicers and lenders are
participating in HARP.

Through conversations with lenders and borrower outreach, the Enterprises found that there is
a subset of borrowers who are eligible for HARP, but are not interested in refinancing despite
the potential benefits. In an effort to encourage these borrowers to apply, the Enterprises
authorized lenders to offer incentives to borrowers who refinance under HARP. At their
discretion, lenders are now permitted to make a contribution to the borrower of up to $2,000
to reduce the HARP-refinanced loan’s unpaid principal balance. Additionally, lenders may
offer a $500 cash equivalent, such as a gift card, to borrowers during the HARP refinance
process.35 The Enterprises do not reimburse lenders for either borrower incentive.

35
  The lender cannot require the borrower to repay either amount. Additionally, the lender must disclose the
contribution in the HUD-1 form as a lender credit.




                                   OIG  EVL–2013–006  August 1, 2013                                        25
       Origination Fees and Closing Costs

As noted above, HARP refinances have origination fees and closing costs like other mortgage
transactions. This includes costs for the application, processing, appraisal, title search, and
other necessary items to complete the refinance.36 OIG found that these upfront fees may be a
deterrent for potential borrowers. FHFA and the Enterprises are aware of this issue, have
taken steps to mitigate it, and offer alternatives for borrowers with limited capital.

In October 2011, FHFA modified two components of HARP to alleviate the borrower’s
burden. FHFA directed the Enterprises to (1) limit risk-based fees and (2) expand the use of
automated valuation models. Both of these changes reduce closing costs.

Additionally, a borrower has the option to borrow closing costs as part of the refinance. This
approach, however, increases the borrower’s unpaid principal balance and reduces the
borrower’s equity. As noted above, Fannie Mae currently permits all origination fees and
closing costs to be added to the loan balance. Freddie Mac, however, limits the amount of
refinance proceeds that can be added to the loan balance to the lesser of $5,000 or 4% of the
unpaid principal balance.37 To support its position, Freddie Mac contends that HARP is a
program designed to help borrowers build equity in their homes. By limiting the increase in
the borrower’s unpaid principal balance, Freddie Mac is managing the credit risk associated
with the new loan. Moreover, a borrower has the option to finance the closing costs through a
higher interest rate.

       Mortgage Insurance

HARP has special requirements for mortgage insurance that are intended to make it easier for
borrowers with high-LTV loans to refinance. Loans that do not have mortgage insurance
coverage at the time of refinancing are not required to obtain mortgage insurance. Loans that
do have mortgage insurance, however, are required to retain mortgage insurance coverage at
the same coverage level for the newly refinanced HARP loan. This applies to both borrower
paid mortgage insurance and lender paid mortgage insurance (LPMI).38




36
     On average, closing costs amount to 3% to 6% of the unpaid principal balance being refinanced.
37
  Several mortgage insurance companies have also implemented caps on the amount of costs and fees that can
be added to the unpaid principal balance of the HARP loan.
38
  LPMI is a type of mortgage insurance policy that is taken out by the lender at the time the loan is originated
and is attached for the life of the loan. The policy allows the lender to collect a higher interest payment from
the borrower and to forward the excess interest to the mortgage insurance company to pay for the mortgage
insurance.




                                     OIG  EVL–2013–006  August 1, 2013                                           26
Under HARP 1.0, borrowers who had loans with mortgage insurance had difficulty
refinancing because the transfer of the mortgage insurance to the refinanced loan was
cumbersome for the same servicer, new lender, and the mortgage insurer. Same servicers
generally viewed loans with mortgage insurance as a “hassle factor” that disrupted the
streamlined refinance process. New lenders found it difficult to refinance loans with mortgage
insurance because it was problematic for the servicer of the old loan and the lender of the new
loan to coordinate transfer of the mortgage insurance policy. Therefore, some servicers and
lenders declined to refinance loans with mortgage insurance.

OIG found that since the implementation of HARP 2.0 the transfer of mortgage insurance has
become considerably less cumbersome. As a result, the majority of mortgage insurance
companies voluntarily agreed to make the mortgage insurance policies fully transferable to
new HARP loans.

However, OIG found anecdotal evidence indicating that borrowers with LPMI face barriers to
refinancing under HARP. Although both Enterprises permit loans with LPMI to be refinanced
under HARP, the complicated nature of this type of insurance may make it difficult for
lenders to transfer. The Enterprises have tried to address this by permitting the borrower to
obtain either LPMI or borrower paid mortgage insurance for the new HARP loan. Ultimately,
it is up to the lenders to decide whether they will refinance loans with LPMI.

Lender Challenges

Prior to the announcement of HARP 2.0, lenders informed FHFA and the Enterprises that
they were hesitant to invest in systems and personnel for HARP because of the program’s
short duration. This resulted in lender capacity constraints – lenders were unable to handle the
volume of borrowers seeking HARP refinances.

In October 2011, FHFA addressed this issue by extending HARP through 2013. By extending
the program, FHFA created an additional incentive for lenders to invest in employees and
systems to process HARP refinances. Then, in April 2013, lenders were given greater impetus
to increase capacity for HARP refinancing when FHFA extended the program through 2015.

As a result of the program extensions and increased borrower demand, lenders are devoting
more resources and personnel to handle the HARP refinance volume. However, OIG found
anecdotal evidence that lenders continue to experience capacity constraints causing some
HARP-eligible borrowers to wait up to 60 days or more for a refinance.

To manage their capacity, lenders try to use their resources as efficiently as possible. Lenders
are more likely to refinance loans for current customers before accepting HARP applications
from new borrowers who are not current customers. Several major lenders, however, have
begun to deplete their HARP-eligible portfolios and are starting to target other HARP-eligible


                              OIG  EVL–2013–006  August 1, 2013                                  27
borrowers outside of their servicing portfolio. Moreover, a number of lenders have begun to
participate in HARP, which helps alleviate capacity constraints, increase competition, and
provide borrowers with a greater selection of lenders.

4. The Future

Helping underwater borrowers refinance their mortgages remains a frequent topic of public
discourse. HARP 3.0 generally refers to further modification of HARP through proposed
legislative action. For example, the Responsible Homeowner Refinancing Act of 2013 is
pending HARP-related congressional legislation.39 While this proposal seeks to codify most
of today’s HARP 2.0 guidelines, it contains several deviations. For example, the proposal
removes the minimum LTV eligibility requirement. Thus, if enacted, it would expand HARP
to include borrowers with LTVs less than 80%. Other stakeholders have suggested that
Congress should expand HARP to include loans that are not currently owned or guaranteed by
either of the Enterprises. Again, this would further broaden the HARP-eligible population.
Analysis of potential legislation, however, is beyond the scope of this report.




39
     S. 249, 113th Cong. (2013); H.R. 736, 113th Cong. (2013).




                                     OIG  EVL–2013–006  August 1, 2013                      28
CONCLUSION ............................................................................

As a result of the HARP 2.0 modifications, HARP refinance volume increased substantially –
particularly for loans with LTVs greater than 105%. As of March 2013, there have been more
than 2.4 million HARP refinances. Additionally, HARP refinances are currently being
originated by more than 250 participating lenders. FHFA’s active administration of HARP
and its engagement of stakeholders have contributed to these outcomes. However, with over
two years left in the program, it is difficult to project how many HARP-eligible loans
ultimately will be refinanced because, among other factors, educating borrowers and
encouraging their participation continue to be major challenges.




                            OIG  EVL–2013–006  August 1, 2013                              29
OBJECTIVE, SCOPE, AND METHODOLOGY .................................

OIG consulted a variety of public and nonpublic sources for this evaluation including:

        FHFA directives, documents, emails, reports, and press releases;
        Enterprise documents, servicer announcements, and press releases;
        Data published or provided by FHFA and the Enterprises;
        FHFA’s and the Enterprises’ websites;
        Borrower complaints made to OIG, FHFA, and the Consumer Sentinel Network;40
        Congressional testimony and speeches of FHFA employees;
        Interviews with FHFA and Enterprise employees; and
        Industry publications.

OIG analyzed these sources by:

        Examining the purpose of HARP and what FHFA and the Enterprises are doing to
         help HARP achieve its purpose;
        Identifying and gathering data on outputs and outcomes of HARP;
        Analyzing impacts of external factors on HARP that neither FHFA nor the Enterprises
         can control such as interest rates, participation by lenders and mortgage insurers, and
         borrower interest in refinancing; and
        Reviewing the Government Performance and Results Modernization Act of 2010,
         which establishes federal planning standards.41

This program evaluation was designed to evaluate HARP using the Enterprises’ current
definition of a HARP-eligible borrower. It does not evaluate the program as it existed prior to
HARP 2.0, nor does it evaluate potential future program changes, such as further broadening
or narrowing today’s eligibility parameters.

This evaluation was conducted under the authority of the Inspector General Act, as amended,
and is in accordance with the Quality Standards for Inspection and Evaluation (January

40
  The Federal Trade Commission’s Consumer Sentinel Network is a database of consumer complaints
collected from federal, state, and local law enforcement agencies.
41
  For example, the establishment of timelines and benchmarks is critical to assess progress in implementing
plans and is consistent with Government Performance and Results Modernization Act planning requirements.




                                   OIG  EVL–2013–006  August 1, 2013                                        30
2012), which was promulgated by the Council of the Inspectors General on Integrity and
Efficiency. These standards require OIG to plan and perform an evaluation that obtains
evidence sufficient to provide reasonable bases to support this program assessment. OIG
believes that this report meets these standards.

The performance period for this evaluation was from February 2012 to June 2013.




                             OIG  EVL–2013–006  August 1, 2013                          31
ADDITIONAL INFORMATION AND COPIES .................................


For additional copies of this report:

      Call: 202-730-0880
      Fax: 202-318-0239
      Visit: www.fhfaoig.gov



To report potential fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

      Visit: www.fhfaoig.gov/ReportFraud
      Call: 800-793-7724
      Fax: 202-318-0358
      Write to us at:
                   FHFA Office of Inspector General
                   Attn: Office of Investigation – Hotline
                   400 Seventh Street, S.W.
                   Washington, DC 20024




                               OIG  EVL–2013–006  August 1, 2013                         32