Urban Institute: Qualified Mortgage impact overblown

Urban Institute: Qualified Mortgage impact overblown

New rules have only slightly slowed mortgage lending

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Loans date back to Countrywide and Merrill Lynch
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No change to agency MBS from principal write-downs via HAMP 2.0

The expansion of the Home Affordable Modification Program by the Treasury Department is expected to benefit special mortgage servicers, mortgage insurers and nonagency mortgage-backed securities holders, while having no material effect on agency MBS, Keefe, Bruyette & Woods said Monday. The White House announced an expansion of HAMP Friday. The plan offers more flexibility for entry into the program when it comes to borrower debt-to-income ratios and investor properties. Previously, if a borrower's first-lien monthly mortgage payment was lower than 31% of income, the borrower was ineligible for HAMP. Factoring other debts to the evaluation will expand the pool of borrowers who can now qualify for HAMP. Investors also were given new incentives for accepting principal write-downs, with the financial benefits for such an action increasing from a range of 6 to 21 cents on the dollar to 18 to 63 cents. The Obama administration also extended the HAMP program deadline through December 2013. "We believe that the more flexible debt-to-income ratio and the inclusion of some investor properties will have a positive impact on modification activity," KBW analysts said in its research note. "The impact of the increased principal reduction incentives remains unclear. While it should help the nonagency sector, the impact would be far greater if there was GSE participation. The response from FHFA on Friday afternoon suggests that the GSEs might not participate," according to KBW analysts. The research firm expects the changes to have "no material impact on agency MBS prepayment speeds." However, special servicers in the mortgage industry are expected to benefit from the modifications. Ocwen Financial Corp. (OWN) earned $28.3 million in HAMP incentive fees in the first nine months of 2011, and KBW believes other firms also will benefit from an expanded HAMP program. Barclays Capital (BCS) analysts also see the changes as having no significant impact on agency MBS. "The reason is that the vast majority of debt forgiveness will be on delinquent loans, which are typically already bought out of the agency MBS trust," Barclays wrote. "The only effect might be from the moral hazard side: if underwater borrowers in agency MBS pools start going delinquent on purpose to qualify for debt forgiveness, speeds will obviously rise. But we think this is unlikely to have a significant effect on agency speeds." Write to Kerri Panchuk.

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