MReport May 2021

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M R EP O RT | 39 SERVICING THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Curing Defaults Through Streamlined Refis With foreclosure moratoria set to expire, the industry is prepping for a wave of defaults, one that can be controlled by bringing back a HARP-type program. U rban Institute Authors Laurie Goodman and Edward Golding have taken a closer look at revisiting the Home Affordable Refinance Program (HARP) in their co-authored blog, "A Streamlined Home Refinancing Program Would Lower Monthly Payments and Prevent Defaults." According to the blog, HARP and streamlined refis proved to be a highly effective tool in preventing mortgage defaults, with more than 3.4 million borrowers from 2009 to 2018 taking advantage of the refi- nancing opportunities it provided. Through federal extensions of the COVID-19 forbearance period, foreclosure and eviction mora- toriums were extended through the end of June, while mortgage servicers nationwide are bracing for what may be a historic flood of foreclosures. The Consumer Financial Protection Bureau (CFPB) recently proposed changes intended to help prevent impending foreclo- sure actions as the emergency federal foreclosure protections are eventually set to expire, but will that be enough to assist the nearly 2.5 million homeowners currently in forbearance plans? "Rigorous studies have esti- mated that this program [HARP], by reducing borrowers' monthly mortgage payments, reduced the default rate on these mortgages by as much as 62%," said the authors in the blog. "Although policy- makers have acted quickly to enact other forbearance programs during the COVID-19 pandemic, HARP or a similar program has not been restarted, despite its previous success." The introduction of a stream- lined refi program akin to HARP could help policymakers help borrowers with low credit scores, low incomes, and small loans, who are disproportionately Black and Latino, strengthen their finan- cial situation and avoid defaulting on their homes. CFPB data has shown that Black and Latino bor- rowers tend to have lower credit scores than white borrowers. "A streamlined refinancing program would benefit these bor- rowers more and could stimu- late economic activity as more borrowers refinance, save money on their monthly payments, and convert some of those savings into spending," Goodman and Golding said. "Borrowers who are in weak financial positions are more likely to use mortgage savings for im- mediate consumption than those in stronger financial situations. And with many low-income bor- rowers experiencing income or wage losses during the pandemic, additional savings could help them meet basic needs." Also cited as a plus to bringing back a HARP-type program is that it could greatly benefit borrowers with low credit scores and those who have lost income, posing only a small cost to the government- sponsored enterprises (GSEs). "Rate-lowering refinancing loans reduce the default risk on loans the GSEs have insured," said the authors. "But the GSEs have sold off much of this risk to credit-risk transfer programs already, so the GSEs would be forced to take the risk back on their own balance sheet or include them in new risk transfer pools at less favorable terms if a refinanc- ing program was introduced. The actual costs to the GSEs would be small, especially given recent robust house price appreciation, and would be in the public inter- est. The GSEs can also price for these streamlined programs when setting their guarantee fees."

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