HARP Is Harping on the Wrong Solution and Bilking Taxpayers

11/29/2011 03:14 pm ET | Updated Jan 29, 2012

Eighty-three Huffington Post readers responded and took me to task about "It's Homebuilding Stupid," an article that I wrote in September. I said that our economic recovery would be rocky until the construction and homebuilding industries substantially improve. Accordingly the government should stimulate those two sectors.

But readers wrote that more building would make matters worse. Others are angry that President Barack Obama is not doing enough to solve their financial problems. Some expressed angst about losing their homes or their inability to qualify for refinancing.

And, so, here comes the Obama administration's Home Affordable Refinance Program (HARP), which was recently modified to include many more homeowners. According to housing pundit John Adams, "The biggest change will allow some homeowners to refinance their homes, even though they owe more on their existing loan than their homes are worth." Accordingly, appraisals will not be required because the program is designed to refinance the entire mortgage regardless of how much it exceeds the property's value. Even more surprising, "owners who have second residences or have moved to another home can still qualify," Adams wrote in the Atlanta Journal-Constitution.

But instead of HARP helping struggling homeowners, it is helping the ones who have the financial wherewithal to make their payments. In fact, the revised HARP program "is targeted at so-called responsible borrowers who are current on their payments and have not been more than 30 days late in the past 12 months," Adams says.

In other words, homeowners and investors, who have demonstrated they do not intend to default, will be permitted to refinance at lower interest rates. While others have walked away from their obligations, these folks have decided to meet their financial obligations.

But here is the rub: To qualify, Freddie Mac or Fannie Mae must hold the borrower's current mortgage. Freddie and Fannie, you will recall, used to be stockholder-owned, government-sponsored entities (GSEs) until they failed. The federal government guaranteed their mortgages and bonds against default. But they made bad loans, became insolvent and were seized by the regulators. Now under conservatorship, these wards of the federal government are costing taxpayers billions of dollars each year and there is no end in sight.

Meanwhile, the good citizens who are paying Freddie Mac and Fannie Mae-owned mortgages at a higher rate will be encouraged to refinance at a lower one. While it is a windfall for the borrowers, it means that less interest will be paid to Freddie and Fannie. That decreases their earnings, and you and I will subsidize them through our taxes.

The revised HARP program also offers an incentive for lenders servicing Freddie and Fannie loans to participate. "Currently, most loans owned by these government-sponsored enterprises contain guarantees and buyback provisions," Adams says. So if an originating lender was careless or deficient in underwriting its loans, or fraud was involved, Freddie and Fannie require that the lender buy the loan back. But when they refinance a loan under the revised HARP program, lenders will be released from liability, even when underwriting omissions or fraud is discovered.

Countrywide Financial, now owned by Bank of America, has been profiled in the press as the worst example of faulty originating and underwriting mortgages. "Some industry watchers have suggested Bank of America may be so anxious to cleanse its Countrywide portfolio that BOA may actually call borrowers and offer to help with the cumbersome refinancing process," Adams says.

In sum, the revised HARP program will help a few homeowners and investors at taxpayers' expense. It will release refinancing lenders from liability. And most disappointing, it may have no discernible effect on improving our economy.

Jerry Chautin is a business mentor, former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at