Wall Street firms updated their forecasts on mortgage prepayments in light of the Obama administration’s announcement this week on modifications to the Home Affordable Refinance Program (HARP). The consensus is for a significant increase in prepayments on Fannie Mae and Freddie Mac guaranteed mortgages, particularly those originated between 2006 thru 2008.
The Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, announced on Monday changes to its HARP program. Initiated in June 2009, the program was designed help underwater homeowners that were current on their mortgages refinance at lower market rates. To date, program participation has been disappointing, with fewer than 900,000 mortgages being refinanced.
The announced changes are expected to kick start the program. Specifically, the FHFA is relaxing the representations and warranties that the new mortgage originator would have to make to either Fannie or Freddie. The concern has been that the originator could be required to repurchase the loan from one of the agencies if it was found that the original underwriting on the mortgage was found to be deficient. In addition, the cap on the qualifying loan to value (LTV) for fixed rate loans, previously set at 125% of the loan balance, has been waived. Finally, the program has been extended from June 2012 until December 2013.
JP Morgan estimates that the HARP program would apply to a universe of 4.6 million mortgages aggregating $740 billion. Of this they estimate that an additional 1.1 million mortgages or roughly 25% will actually be refinanced through HARP. Assuming a 2% reduction in rate, that would amount to annual reduction in debt servicing of $3.5 billion. JP Morgan projects a significant impact from the new changes and concludes, “in our view, the market is under-estimating the potential impact of HARP 2.0”.
Nomura Securities notes that most refinancing to date under HARP has been made by the same servicer that underwrote the original loan. A different bank or servicer has been reluctant to refinance that loan for fear of assuming the rep and warranty liability. Nomura argues that relaxation of the reps and warranties, if substantive, would foster significant competition to refinance. Nomura also points out that extending the program until December 2013 gives originators the requisite time horizon to make a significant investment in a refinancing effort. Depending on vintage and coupon, Nomura projects prepayment speed increases of 7% to 14% depending on cohort.
Additional details on HARP are expected on November 15.
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