When the White House announced its plans to modify the Home Affordable Refinance Program (HARP 2.0), mortgage-backed securities (MSB) investors worried a flood of mortgage refinances would cut into their expected return on investment for their mortgage bonds holdings. These bonds offer a higher rate of return than other instruments on the market.
It may still be too early to ascertain the effects of HARP 2.0 on MSBs. Nonetheless, after the Federal Housing Finance Agency (FHFA released new HAMP guidelines last Tuesday, the MSB market, backed by Fannie Mae and Freddie Mac mortgages obviously took the announced changes as “good news.” The market moved up.
This market activity signaled investors’ confidence the revisions will a limited number of the homeowners holding high interest rate mortgages.
In an effort to increase the numbers of borrowers able to refinance, Fannie and Freddie eliminated the 125 percent loan-to-value- ratio cap, which kept many homeowners from refinancing their mortgages. In addition, Fannie and Freddie lowered or abolished some fees and, in most cases, the need for property appraisals.
To increase lender participation in the refinancing program, Uncle Sam also waived certain representations and warrants made by lenders, under the old mortgages. This protects mortgage lenders from potential liabilities regarding questionable practices activities on those mortgages.
MSB Investors Concerns Alleviated
Purchases of bonds, supported by mortgages carrying interest rates of 6 percent and 6.5 percent, ticked up after the release of HARP 2.0 details last week. Banks, hedge funds, pension funds and the Federal Reserve Board actively purchased MSBs. Investors expect to receive attractive monthly interest payments on their capital, without the concern of a massive number of borrowers prepaying their mortgages.
Par refers to the prepayment of a mortgage at 100 percent on the dollar, by the borrower or bank. If mortgage bonds investments trade above par—some may trade as much as 110 percent on the dollar, homeowners refinancing mortgages, which make up the investments, create losses for investors.
Todd Abraham, of Pittsburg-based Federated Investors in Pittsburg, a financial services company specializing in government and mortgage bond companies, states investors feared a blitz of borrowers prepaying their mortgages. However, according to Abraham,” "It doesn't look like they've done anything big here."
It seems after 12 months of uncertainty regarding HARP and other programs, such as mortgage modifications, one of the biggest concerns for MSB investors—a run on mortgage refinances— has dissipated. The positive reception of HARP 2.0 seems to confirm this perception.
Many borrowers still have obstacles in place, which prevent them from refinancing to take advantage of low mortgage rates. Core issues that contribute to the five-year decline in the housing market remain unresolved by politicians.