The residential mortgage-backed securities market has been picking apart the Home Affordable Refinance Program for months, and sometimes it’s hard to see why they bother. When the long-feared HARP 2.0 finally came out late last month, it was largely greeted by yawns. Pundits said the only way the program would really impact the market was if it got servicers on board (SI, 8/24). But now, with Fannie Mae and Freddie Mac making public their changes in refi activity under HARP 2.0, some are saying those fears could be realized.
The government-sponsored entities released details of their implementation of HARP 2.0 earlier this week, and JPMorgan analyst Matt Jozoff said Freddie and Fannie’s shifts could light a fire under servicers. “We continue to believe that the biggest impact from these announcements is in changes in servicer behavior,” he wrote in a note to clients earlier this week. He said the easing of representation and warranty requirements for high loan-to-value ratio loans effectively incentivized servicers to offer refis on loans they wouldn’t have touched before. Jozoff explained easing the reps and warranty requirements, as well as removing the old 125 LTV cap, should make servicers confident about refinancing. He pegged the bottom-line impact of this change in servicer behavior at a 10-15 increase on current conditional prepayment rate levels across aggregated coupons in agency RMBS.
Everyone agrees an explosion in servicer activity would be key, but some disagree with Jozoff that Freddie and Fannie’s move has that boom on the way. The Royal Bank of Scotland strategist Sarah Hu questioned whether the announcement was a game-changer, saying Freddie and Fannie’s new rules were more likely to tie servicers up in knots. “For example, Fannie Mae stated that while lenders may solicit above-80 LTV borrowers, they can’t specifically solicit low-LTV borrowers with mortgages owned/securitized by GSEs,” Hu pointed out. “This obviously creates difficulty in implementation because when lenders solicit borrowers, a) they won’t necessarily know the borrowers’ current LTV, and b) if they mistakenly solicit the below-LTV borrowers, they could potentially be penalized.”
Just because one side of the mortgage market sees a bombshell in HARP, it’s not going to go off unless the servicers, the guys actually talking to borrowers with little value left in their homes, want to set it off. While it remains to be seen whether Freddie and Fannie’s new criteria are the motivation servicers have been looking for, it seems clear that pushes aimed at them are the only way to go.