In June 2012, Fannie Mae’s Economic and Strategic Research (ESR) team explored the benefits of refinancing for American households and the U.S. economy (see FM Commentary: Refinancing Helps Many Households Restore Their Financial Health). Between 2009 and November 2012, Fannie Mae refinanced more than 8.9 million mortgages, including nearly 1.2 million loans refinanced through the Home Affordable Refinance Program (HARP).1 HARP was created to help borrowers refinance despite having little or negative equity in their homes due to a decline in their home value. In late 2011, HARP guidelines were expanded to remove many of the barriers affecting borrowers who are current on their mortgage but are deeply underwater.
In the ESR piece cited above, Orawin Velz writes, “refinancing lowers their monthly mortgage payment, freeing up cash that can be used for other goods and services.” To put this into context, borrowers who refinance through HARP have an average weekly savings of approximately $83.2 According to the Bureau of Labor Statistics, this savings would pay for the average household’s weekly clothing costs or about 50 percent of a household’s weekly food consumption.3
Despite the potential financial benefit from refinancing, hundreds of thousands of potentially eligible underwater borrowers have yet to take advantage of the HARP program. This begs the question: why?
To understand underwater borrower motivations and potential barriers to refinancing, the ESR team conducted a survey of HARP-eligible borrowers who have loans held by Fannie Mae, as of July 2012. Among the 2,400 respondents, half of those surveyed have already refinanced through the HARP. The other half have not refinanced through HARP, but would meet the eligibility criteria to do so according to our estimation. For each refinanced and not-refinanced subpopulation, the sample is evenly distributed across three loan-to-value (LTV) categories: 80-105 percent, 105-125 percent, and 125+ percent.
The survey revealed the following findings:
Misperceptions and distrust hamper borrowers: Many HARP-eligible borrowers who have yet to refinance do not fully understand the program’s terms. For example, 38 percent of deeply underwater borrowers (LTVs of 125 percent or greater) said that they would need to pay additional money to refinance because their home has lost value. Twenty-eight percent of deeply underwater borrowers also questioned whether they would qualify at all for a refinance.
Additionally, nearly a quarter of those who have yet to refinance said that they have “received too many mailings or offers to take any seriously.” Twenty-two percent of borrowers who have yet to refinance said that they “do not trust the lender that contacted [them].”
While borrowers are motivated by reducing their monthly payments, concerns about closing costs and extending terms are barriers to refinancing: Borrowers who have refinanced cite the ability to reduce monthly payments as the primary reason for refinancing. At the same time, those who have yet to refinance cite concerns regarding closing costs and the fact they do not want to take out another 30-year loan as the primary barriers to refinancing.
Borrowers look to mortgage servicers to inform their decision on refinancing:It is clear that a servicer is an important conduit of information and can play a meaningful role in a borrower’s decision-making process. The survey shows that borrowers who have refinanced are far more likely to have heard about HARP from their mortgage servicers than those that have not refinanced.
Over the past 12 months, partly due to expanding eligibility rules, we have witnessed a significant increase in HARP volumes. At the same time, many borrowers remain on the sidelines. Our National Housing Survey shows that about 55 percent of homeowners have refinanced the mortgage on their current homes. However, our survey of HARP-eligible borrowers indicates that there are potential barriers and misperceptions that may be overcome to encourage borrowers who have not yet refinanced to explore their options. Overcoming these barriers and misperceptions could benefit households. Importantly, for many borrowers who are currently eligible for refinancing, time may be running out – HARP is scheduled to expire at the end of 2013.
Vice President for Financial Markets and Policy Research
Economic & Strategic Research