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As Home Equity Lifts, Should Aid Ebb?

A s mortgage rates hovered near all-time lows in January, Maryland mortgage broker David Horvath sent out direct mail to 1,000 homeowners, offering to help refinance their mortgages using one of the government programs created in the wake of the housing crisis.

The response was overwhelming, confirming to Horvath his suspicions about homeowners struggling with mortgage payments: "That shows the demand and need for help is there," he said.

However, views differ sharply on whether the U.S. housing market needs continuing help.

Seven years after the downturn began and about a year and a half into an upturn, home values are appreciating by double-digit gains from a year ago, banks are lending and inventory is creeping up.

Prices remain about 20% below the peak of the bubble in 2006, as measured in the latest Case-Shiller 20-city composite index reading, for August. They've rebounded to mid-2004 levels.

But with all the buying in the boom years, approximately 10.8 million American homeowners, or 21% of those who have a mortgage, remain "underwater," owing more on a home than it is worth, thus typically unable to qualify for refinancing.

Those statistics, out Thursday from real estate tracker Zillow (Z), show more than 4.9 million homeowners have gotten out of negative equity since the level peaked at 31.4% in the first quarter of 2012. It's amid broad home price gains, though foreclosures do play a role.

Though the "effective" negative equity rate is said to be 39.2%, adding in homeowners with less than the 20% equity typically needed to cover expenses when selling the home or buying another.

Pros And Cons Debated

Horvath, who describes himself as "pro-business," says the best cure for what still ails much of the housing market is a program like HARP, the Home Affordable Refinance Program, and he says it should be expanded so more people can take advantage of it. He believes there's an untapped market of people who got their mortgages too late to qualify under current rules.

That flies in the face of what many industry analysts believe. The Urban Institute's Housing Finance Policy Center estimates that only 188,000 people can still take advantage of HARP, which is designed for people with a mortgage guaranteed by Fannie Mae (FNMA) or Freddie Mac (FMCC) . To use it, borrowers must have been making timely mortgage payments and have a loan-to-value ratio greater than 80%. There's no cap on how high that ratio can go.

The program does not require outright taxpayer funding, but seeks to match willing lenders with borrowers who need help. HARP and the FHA Streamline refinancing program, for FHA loans, both waive some traditional underwriting requirements for getting a mortgage.

Data from the Federal Housing Finance Agency — Fannie and Freddie's regulator — show that 2.9 million people have used the program since it launched in 2009. But as home values and interest rates march upward, HARP's potential for borrowers represents slim pickings, says Anthony Sanders, a real estate finance professor at George Mason University, in Virginia.

"The life force has gone out of HARP," he said, adding that lenders and brokers who continue to pluck its strings are simply hoping to cash in on refinancing fees.

FHFA data show how HARP refis have plunged as mortgage interest rates have risen. These refis hovered around 100,000 a month last winter and began dropping steadily, reaching 68,000 in August, the latest month for which data are available. In September FHFA launched a marketing campaign using a reality TV star as a mouthpiece and undertook social media efforts to get word out about the program, in an attempt to attract as many borrowers as possible before it ends in 2015.

How many people are still "HARP-able"? An FHFA representative declined to say.

Who Benefits?

The re-launch is an easy way for the agency to show it's making an effort to reach homeowners, Sanders said, while ignoring the reality that few people remain who could use the help.

However, across the country from Horvath, Cyndee Kendall, a vice president of lending at Bank of the West in the Bay Area, also sees value in HARP. She calls it "still a product we need to support and market with our customer base to make it something they're aware of.

Kendall acknowledges that matching a customer with a more affordable mortgage payment is in the bank's best interest, but also thinks a few hundred dollars a month in the pockets of more households could help individuals and provide a boost to the economy.

Horvath and Kendall both believe that homeowners have never been fully aware of the possibilities that HARP could have provided them. Earlier versions of the program required that homeowners have some equity in their homes, and some lenders think many owners of homes whose values plunged don't know that was changed. Horvath has gone so far as to travel to Washington, to lobby members of Congress to change the HARP cutoff date of May 31, 2009, by which time a mortgage needed to have closed (and been sold by the lender to Fannie or Freddie).

Laurie Goodman, director of the Urban Institute's Housing Finance Policy Center, said changing the cutoff date would be "unbelievably disruptive" to the mortgage-backed securities market, however, and would damage the credibility of FHFA among those who buy and trade those securities.

While HARP doesn't present a direct cost to taxpayers, Sanders says, there may be indirect costs down the road. "The theory is that if people are making payments now and they're in trouble and we lower their payments, they're better off," he said. "But if they're making payments, why bother? It's a gamble.

However, for Horvath it's about fairness: "Why can one neighbor who bought 30 days before another do something to lower their payments? That's what I hear from the people who contact me. Yes, the bank's going to get a little less in interest and someone trading securities on the back end is going to make a little less money but it doesn't seem to me like those people are hurting.

Kendall knows the housing recovery has been slower and more plodding than most people would like, especially since most homeowners were buffeted by events beyond their control in the Great Recession.

"But it does come around," she said. "We're seeing that, and that's what gives us some hope.

"I still think we have a good couple of years before we have a borrower pool that is unaffected by what happened."