By Frank T. Pallotta
SEP 25, 2015
A Good Start: Typically, when something seems too good to be true; it probably is. However, this is not the case with the Home Affordable Refinance Program (HARP). HARP – in its current form – is the only refinance lifeline an underwater borrower has left, to take advantage of the lowest interest rates most of us will see in our lifetime.
Originally introduced in 2009, HARP allowed underwater homeowners – for the first time – to refinance their current GSE-backed loan, at the then prevailing rate, as long as the homeowner’s Loan to Value (LTV) ratio did not exceed 105%. Unfortunately, six months after the programs initial launch, borrowers had not taken advantage of HARP in the numbers anyone had hoped for. The problem nevertheless, seemed somewhat obvious and easy to solve. Because home values had fallen nearly 30% from their peak, the program’s anemic volume could easily be attributed to an arbitrarily imposed LTV cap of only 105%.
HARP 2.0: So back to the drawing board with one simple task: Drive more underwater homeowners toward HARP without taking on additional risk for the government . It didn’t take long for the team at Treasury and FHFA to determine that simply lifting the LTV cap on HARP altogether (and providing some “rep relief”) would accomplish both.
As a result, underwater homeowners would now be able to benefit from the rarest of anomalies: a Government sponsored program that could simultaneously assist the consumer, the tax payer, the capital markets, and residential housing in general.
The Dilemma: Prolonged low rates have also played a significant role in record volumes by pushing borrowers toward HARP (and non-HARP) refinance opportunities. The good news is that more than 3 million homeowners to date have benefited from participating in HARP, saving on average, more than $1,600 annually. The bad news unfortunately, is that nearly 700,000 HARP-eligible borrowers have yet to take advantage of the program. What’s even more disconcerting is that the HARP window will be closing at the end of 2016, leaving hundreds of thousands of consumers without an option to refinance their underwater loan after that date. The government can always chose to extend HARP (again) with a simple pen-stroke, but the decision by the consumer to HARP (or not to HARP) is still largely dependent on two independent variables. First, they must ultimately qualify for a HARP. Second, the new payment would have to be lower than the borrower’s current payment in nearly all cases. (Borrowers may also select a 15 year term when looking to refinance a 30 year loan to take advantage of an accelerated amortization rate, but their monthly payment would likely increase). The real problems arise when the underwater borrower “wakes up” six months from now and begins to explore a HARP. If rates are much higher than they are now (which appears to be the trend given recent chatter by the Federal Reserve Board of Governors), the borrower may not be able to refinance. Consequently, if rates remain low for the next 16 months, and the underwater homeowner begins to seek a refinance after December 31st 2016, they will find that they missed the HARP window and are no longer eligible to apply. If the HARP-eligible, underwater homeowner does not act soon, they may literally miss out on a once-in-a-lifetime opportunity.
HARP Burnout?: The problem for lenders and servicers is not an easy one to solve. Presumably, they have been trying to reach these borrowers for quite some, but with limited success. Could this be a question of “HARP burnout”, or is it something else? Is the mortgage industry still a step behind the times when it comes to consumer marketing and borrower behavior? Mortgage “burn out” is a term used to describe the condition where a “tail” (or very small percentage) of a borrower cohort who after repeated swings in interest rates, will likely never refinance – regardless of rate. However the dilemma our industry is currently experiencing – lackluster HARP participation – is very different and not entirely related to burnout. 700,000 out of a nearly 4,000,000 homeowners have not yet taken advantage of HARP. This percentage (more than 17.5%) is much too high to be labeled a “tail”, and too high to be ignored. Not only are the potential savings for the homeowners and the revenue for the lender substantial, but so too are the long-term benefits to the government by way of lower default rates on loans they effectively guaranty.
Contacting is not the same as Engaging: Contacting an underwater borrower with a message related to their financial position, and convincing the borrower that a particular path to that benefit is simple and free; appears much easier than it really is. Consumers are bombarded every day with solicitations, flyers, commercials, billboards and television/radio ads – and that’s before they even turn on a computer or smart phone! They are then hit with pop-ups, SPAM, junk, banner ads and video clips, all extolling the virtues of a refinance.
In 2014, after designing and launching dozens of private-label HARP Catalyst Campaigns for banks, mortgage insurers and servicers across the US, hundreds of underwater borrowers who had responded to our unique, consumer outreach methods (and had completed a HARP refinance) were surveyed as to why, after past solicitations, they had not previously pursued a HARP. Their answers (below) were quite surprising considering their lender had informed us that the borrower was likely sent dozens of notifications and received multiple phone calls:
- 62.7% were either not fully aware of HARP, or did not think they would qualify
- 22.2% were aware of HARP, but had concluded they “did not qualify” because they had been previously denied by another lender*
- 12.2% were aware of HARP, but had not yet found the time to apply
- Only 2.9% were already in the “HARP application” process when we contacted them
* Usually, a high LTV borrower who initially sought a HARP – from a lender who was not their current lender and were subsequently denied
The Solution: The primary reason 700,000 HARP eligible borrowers continue to remain on the sideline is very simply: They have not been engaged in a way that forces the borrower to believe HARP either applies to, or benefits them. Form letters, blind solicitations and blast emails are obviously not the answer for this particular cohort. Additionally, radio and television ad placements have also shown very limited success recently. Keep in mind, that while refinancing activity remains strong, the borrowers who would benefit most from a HARP (Loan-to-Values greater than 110%) are being left behind because they are not being solicited or educated properly as to how HARP would apply to them. Outreach methodologies, messaging, sequencing, timing and frequency of contact should all vary slightly depending on borrower and property risk characteristics, as well as coupon spread, WALA (loan age) and more. It’s not about “the HARP message” itself, as much as it is about the way that message is delivered. Moreover, “that” message will also need to change with time, technology, geographic region, the economic environment, seasons and more.
Reticent underwater borrowers are no more willing to flock to a HARP on their own, than the alcoholic is willing to run to an AA meeting simply because they know where the meetings are being held.
Why are some people willing to hand over an email address, phone number, social security number and their mother’s maiden name to a complete stranger, in exchange for a free, non-fat frappuccino with extra whipped cream and chocolate sauce; yet they are not willing to spend five minutes exploring the opportunity to save hundreds of dollars a month?
Know your customer as well as your environment. Understanding what motivates a borrower to act, is entirely different than understanding what motivates them to engage. There is no borrower action without proper engagement; and there is no engagement without an appropriate and relevant connection with your consumer.
ABOUT THE AUTHOR:
Frank T. Pallotta is the CEO/Founder of Ramsey, NJ-based Steel Curtain Capital Group LLC, a mortgage advisory firm specializing in managing residential mortgage risk through the design and implementation of consumer marketing strategies and outreach campaigns.