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BORROWER OUTREACH CRITICAL TO HARP'S SUCCESS Undoubtedly, broadening eligibility for the Home Affordable Refinance Program (HARP) has allowed more borrowers to benefit from the program. However, HARP rules aren't the only obstacles stunting refinance volume. A report from the Federal Housing Finance Agency Office of Inspector General (FHFA OIG) found a lack of borrower education is also a critical barrier to the program. HARP was first introduced in March 2009 with the expectation that 4-5 million borrowers would be refinanced under the program. In September 2011, the program refinanced fewer than 1 million borrowers, according to the report. With the introduction of HARP 2.0, which removed the 125 percent loan-to-value ratio ceiling, refinance volume surged and is now at 2.6 million as of May. The program also recently received a two-year extension and is scheduled to expire December 31, 2015. Although some analysts suggested removing additional program rules could increase eligibility, FHFA OIG found education also remains an important issue. "[M]any borrowers have not heard of the program, confuse the program with other government housing programs, or do not realize that they are eligible," the report stated. For one, the report explained under HARP 1.0, lenders turned borrowers away because of credit and process overlays and capacity restraints, leaving borrowers under the impression that they were not eligible. Due to changes over the years, FHFA OIG stated lenders have largely removed credit and process overlays and increased their capacity. Also, borrowers may not realize they can refinance with any participating lender. To encourage participation, lenders also solicit HARP-eligible borrowers. According to the report, some borrowers fail to respond because they don't recognize the lender or they assume ineligibility since they are underwater. To increase credibility, the GSEs have allowed lenders to co-brand and use the GSEs' names in solicitation materials. Also, to encourage borrowers who simply are not interested, lenders are able to make a contribution of up to $2,000 to reduce the unpaid principal balance. The amount is not reimbursed by the GSEs. To address borrower misconceptions, FHFA announced plans to implement a nationwide public relations campaign to further educate borrowers about the program. Since HARP's 2009 inception, the program has refinanced more than 2.6 million loans. Underwater borrowers, or those with loan-tovalue (LTV) ratios greater than 105 percent, continue to account for a large percentage of HARP refinances, representing 44 percent of the total volume year-to-date through May. FHA TRIMS WAITING PERIOD FOR BORROWERS WHO EXPERIENCED FORECLOSURE The Federal Housing Administration (FHA) is allowing borrowers who went through a bankruptcy, foreclosure, deed-in-lieu, or short sale to re-enter the market in as little as 12 months, according to a mortgage letter released last month. Typically, borrowers who experienced a foreclosure must wait at least three years before they have a chance of being approved for an FHA loan, but under the new guidelines, certain borrowers who lost their home as a result of an economic hardship may be considered for FHA financing significantly earlier. For borrowers who suffered a recession-related financial event, FHA stated it realizes "their credit histories may not fully reflect their true ability or propensity to repay a mortgage." In order to be eligible for the more lenient approval process, potential borrowers must provide documentation showing "certain credit impairments" were from loss of employment or loss of income that was beyond their control. 72 The lender also needs to verify the income loss was at least 20 percent for a period lasting at least six months. Additionally, borrowers must demonstrate they have fully recovered from the event that caused the hardship and complete housing counseling. According to the federal agency's letter, recovery from an economic event involves reestablishing "satisfactory credit" for at least a year. Criteria for satisfactory credit include 12 months of good payment history on obligations such as a mortgage, rent, or credit account. The new guidance is for case numbers assigned on or after August 15, 2013, and is effective through September 30, 2016. KNOW THIS Fitch Ratings says the tapering of Federal Reserve bond purchases will not have a significant negative impact on U.S. banks' liquidity or the availability of credit. BERNANKE STRESSES ASSET PURCHASES NOT ON SET SCHEDULE The Federal Reserve will continue its current policy of buying up $40 billion in agency mortgage-backed securities (MBS) and $45 billion in Treasuries per month as long as economic conditions warrant such measures, Federal Reserve Chairman Ben Bernanke explained in testimony before the House Financial Services Committee. "I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course," Bernanke said. This assertion is nothing new, according to Paul Dales, senior economist at Capital Economics. However, "the message that the tapering of QE3 is not set in stone and that the end of the asset purchases won't be immediately followed by higher interest rates is increasingly getting through to the markets," Dales said in response to Bernanke's testimony. In purchasing MBS and Treasuries, the Fed aims to stimulate "substantial improvement in the labor market." Together the asset purchases and the Fed's "forward guidance" also work to keep interest rates low. Should the FOMC's projections pan out for acceleration in GDP growth, improving employment, and a slight increase in inflation, the Fed suggested it will begin reducing the pace of its asset purchases by the end of this year and stop them completely by the middle of next year. However, if economic conditions do not fall in line so favorably, the Fed will continue on its current purchase path. Additionally, when the Fed ceases asset purchases, it will not release them to the market immediately. Holding the assets and reinvesting any resulting earnings will further contribute to economic recovery and support the mortgage market, according to Bernanke.

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