What HARP 3.0 would do to agency MBS
The recent election put President Barack Obama back into office, creating the possibility of deeper refinancing options for borrowers.
The impact of deeper refinancing activity on mortgage-backed securities remains unknown, especially when dealing with prepayment risk.
Yet, Sarah Hu, an analyst with Royal Bank of Scotland, says the impact of more loans qualifying for HARP in the future could very well remain limited since reductions on seriously delinquent agency loans will not impact prepayments since loans securitized by the GSEs are pulled out once they become 120 days or more delinquent.
Furthermore, she added, the basic pooling and servicing agreements for Freddie Mac and Fannie Mae pass-throughs stipulate that the loans cannot be pulled out of pools once they face the risk of default, Hu wrote.
There is already discussion of a type of HARP 3.0 as two U.S. Senators Robert Menendez, D-NJ, and Barbara Boxer, D-Calif., push for a bill to expand principal reductions.
Hu wrote, "We continue to believe that the chance of modifying the HARP cut-off date is low, given the program's already noticeable success even without having modified the date. However, investors should be aware of the potential impact of such changes on prepayments. Our analysis suggests that if the cut-off date is extended for one year, 16% of the 30-year universe could become HARP eligible."
And if the cut-off date is eliminated, the impact on more refinancings could cause 24% of conventional 30-year borrowers to be HARP eligible, which would push the HARP eligibility rate up significantly from its current 11% level today.