A week ago the Obama Administration announced revisions to the Home Affordable Refinance Program (HARP).

 

Better late than never! Actually, coming three years belatedly, a change to HARP may bring some relief to homeowners and the economy.

 

But is it a viable solution?

 

As you may know, I have written extensively about the failure of both the Home Affordable Modification Program (HAMP) and HARP.

 

Is the new and improved version of the two-year old HARP a quick fix or yet another boondoggle in the making?

 

Last week's announcement stems from the revisions developed by the Federal Housing Finance Agency (FHFA), the GSE's overseer, with feedback from lenders, mortgage insurers and other mortgage industry participants. In a sense the revisions are a patent admission that the economy simply will not regain its strength without a robust real estate market; or, put another way, jobs will not return unless a strengthened real estate market returns.

 

The linkage of real estate to jobs has roots in the MBS World, a murky realm way below the revisions contemplated by the Administration and the homeowners' needs.

 

The Federal Reserve has a central place in the MBS World, since it is permitted to participate in the agency MBS financial instruments, and not permitted to participate in buying equity, real estate, or corporate debt.

 

Remember: MBS yields are the primary trigger in the formation of mortgage rates. The safest financial instruments, of course, are Treasuries; so, relative to Treasuries, the margin or spread between mortgage rates and yields on 10-year Treasuries has continued to move upward. When the Fed makes its MBS purchase, it thereby reduces mortgage interest rates, compressing those relative margins. Operationally speaking, then, a so-called target for mortgage rates is set in this manner.

 

Ostensibly, lower mortgage rates lead to refinances and the concomitant diminution of financial pressure on homeowners who have been trapped in the housing crisis with underwater mortgages, because such reduction both lowers the cost of debt service through refinance and supports purchases of houses, which creates demand - and thus an increase in pricing - for housing.

 

To date, a tiny percentage of seemingly eligible borrowers have refinanced through HARP.

 

In my estimation, these are the factors that led to the HARP failure [ … ]