The New Improved HARP

By Clive Crook

James Hamilton provides a typically crisp, clear overview of the administration's new plan to promote mortgage refinancings. The scheme's main innovation is to remove obstacles to refinancing for underwater borrowers so long as they are up to date on payments. Like other analysts (see Calculated Risk), Hamilton concludes that the plan is helpful, as far as it goes.

My conclusion is that the direct consequences of the proposal potentially may entail a modest adverse budget impact, but that indirect benefits to the overall economy and perhaps even to the Treasury as well outweigh these. The proposed modification of HARP looks to me like a reasonable plan.

(One of Hamilton's commenters references a CBO working paper which goes through the arithmetic of a generic refinancing plan in detail. Worth reading.)

I agree with Hamilton's assessment. I only wonder, since the issues are straightforward and the execution not that complicated, what took the administration so long?

The new HARP is good in its own right. The problem is that its reach is limited. The economy needs principal reduction as well as refinancings, and support needs to find borrowers who have fallen behind in making their payments--the ones at imminent risk of adding to the foreclosure overhang--as well as those who are current. On fairness and moral hazard grounds, there needs to be a quid pro quo for principal reduction (equity transfer is one possibility) and this makes wider intervention more complicated. The upfront taxpayer cost will be much bigger too. But repairing the housing market--and hence the wider economy--will take far longer without it.

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