Author: steelcurtaincapital

Why so many HARP-eligible borrowers remain on the sidelines

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:


  1. 62.7% were either not fully aware of HARP, or did not think they would qualify
  2. 22.2% were aware of HARP, but had concluded they “did not qualify” because they had been previously denied by another lender*
  3. 12.2% were aware of HARP, but had not yet found the time to apply
  4. 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.



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.  

7 Stresses on Borrowers’ Ability to Repay

By National Mortgage News
Sep 15, 2015

Loan performance has improved since the housing crisis. But credit challenges persist, while higher housing costs combined with a plateau in wages have put increased strain on some borrowers’ finances.


View the slideshow here: National Mortgage News.

Bad Loans Remain Well Above Precrisis Levels

By Jackie Stewart
Sep 23, 2015

The banking industry continues to sit on a mountain of problematic loans seven years after the onset of the financial crisis.

The banking industry continues to sit on a mountain of problematic loans seven years after the onset of the financial crisis.

Credit quality, to be sure, is substantially better than it was during the peak of the crisis. But the amount of nonperforming assets on banks’ books is more than triple the levels reported in 2006.

Banks have been more reluctant to offload a number of credits in bulk sales, and loss-share agreements have also forced banks to keep sour loans on their books. Low interest rates, along with a lack of better reinvestment options, have also influenced executives’ decisions.

Still, the continued existence of troubled assets could prove problematic should the banking industry face another economic downturn, industry observers warn.

Continue reading at National Mortgage News.

Steel Curtain Capital: News & Blog

Here you’ll find the latest articles and interviews with the SCCG team. In addition, other article’s included on our website — written while with previous firms — will be properly noted.

We realize that the home mortgage loan business is constantly shifting. To stay on top of the latest analysis, we’ve highlighted pertinent articles by other experts, with links to the respective news websites.

How to Stay Afloat in the Coming HELOC Reset Tidal Wave

By Erica Abendschoen and Frank T. Pallotta
JUL 21, 2015

Resetting home equity lines of credit to the tune of $150 billion over the next 48 months, combined with a near-certain increase in short term interest rates over that same period, could very well be a bad situation for institutions who hold these assets.

Simply creating a preemptive solution, or series of solutions, for borrowers facing hardship is not enough. While it’s important to know that borrowers fully understand the reset risk they face as well as the options available to them; it’s critical that those consumers actually follow through to reduce their risk — and yours.

In a perfect world, the consumer who is facing a significant increase in their monthly HELOC payment would not only be aware of the coming increase, but would be mindful of all available options before moving quickly toward a solution that benefits all parties.

However, this does not tend to be the case. It is entirely reasonable to assume, for example, that a borrower who has made timely payments over a 10-year period, simply may not know, or realize, that their monthly HELOC payment might soon double or triple, until it’s too late. Automated phone calls, website pop-ups, email blasts and generic marketing flyers all continue to be the marketing tools of choice for the lending industry. As a result, consumers are much more likely to tune out than they are to pay attention to a simple notification from their bank – especially if the borrower happens to be current on their payments.

Underwater HELOCs that are more than 60 days delinquent have a greater than 75% chance of eventually defaulting and losing nearly 100% of their value. With this in mind, it’s not surprising to see that regulators are keeping an extremely close eye both on these assets as well as the institutions who own them.

Consumer outreach methodologies and paths can vary dramatically depending on multiple risk factors. For example, the outreach message and methodology for a lower-risk borrower (780 FICO score), with a medium-risk loan (80% combined loan-to-value), facing severe payment shock (300%) may be entirely different than that of a high-risk, underwater borrower facing only moderate payment shock. Continue reading at National Mortgage News.

56 Percent of 3.3 Million HELOCs Scheduled to Reset With Higher Payments Over Next Four Years Are on Underwater Homes

March 05, 2015 00:01 ET

Estimated Balance of Resetting HELOCs at $158 Billion, $88 Billion on Underwater Homes; Average Payment Increase of $146 a Month; California, Florida, Illinois With Most Resets

IRVINE, CA–(Marketwired – March 05, 2015) – RealtyTrac® (, the nation’s leading source for comprehensive housing data, today released its first-ever U.S. HELOC Resetting Report, which found that 56 percent of the 3.3 million Home Equity Lines of Credit potentially resetting with higher, fully amortizing monthly payments from 2015 to 2018 are on properties that are seriously underwater.

For the report, RealtyTrac analyzed open HELOCs originated between 2005 and 2008 with the assumption that these loans will reset with fully amortizing monthly payments after a 10-year period of interest-only payments. RealtyTrac used average HELOC utilization rates from the New York Federal Reserve and the prime interest rate of 3.25 percent to calculate the outstanding balance of the loans and to calculate the interest-only and fully amortizing monthly payments. See full methodology below.

Continue reading at Market Wired.

`Great Time’ to Buy a Home in U.S., Pallotta Says

‘Payment Shock’ on HELOCs Is a Looming Concern for Regional Banks

By Kate Berry
Jan 22, 2014

A new report from Moody’s suggests that roughly a dozen regional banks are at risk of sustaining meaningful credit losses on home equity lines of credit that were originated in the boom years and are scheduled to reset over the next three years.

Analysts with Moody’s Investors Service are warning that banks face higher delinquencies and incremental losses on home equity lines because borrowers are susceptible to “payment shock,” when the loans start resetting after 10 years and the borrowers have to start paying both interest and principal. Continue reading at National Mortgage News.

Shortening the Long and Winding Road to HARP Assistance

By Frank T. Pallotta
APR 17, 2013

In the early ’80s, 30-year mortgage rates were an eye popping 12½%. Of course the Prime Rate was 11%, 12 month CDs were paying 10% and the 10-year Treasury note was yielding a lofty 11%—so everything truly was relative. In fact most industry participants in 1983 never thought we’d see mid-single digit mortgage rates again.

More than a generation later, mortgage rates have again dropped to “Kennedy-era” levels and the Home Affordable Refinance Program—if executed to its full potential—can help get housing back on a long-term road to recovery.

In its purest form, HARP is considered one of the best “government-sponsored” programs in a generation. It is stimulative to the economy at the very least, and a much needed lifeline to struggling homeowners at its best.

Skeptics however, see HARP as another way for the country’s largest banks to again line their pockets—after a bailout of only a few years ago, helped save their hides. Why do skeptics feel this way?—because far too many eligible borrowers are still not able to find HARP relief. It’s time for the country’s largest servicers to aggressively target their own high risk, “HARP eligible” homeowners. It’s time for payback.

Social Security, the GI Bill, and the creation of the U.S. Highway system are three noteworthy government programs that helped countless tens of millions of Americans build wealth, secure their financial future, and build a base from which to prosper. While HARP may not have the same long-term, financial impact on the country, it does have the ability to provide immediate financial relief. Continue reading at National Mortgage News.