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Investments / Lending / Servicing

FHFA head nominee presents hurdles for investors

As Senate vote awaits, HARP concerns loom

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Rep. Mel Watt’s, D-N.C., nomination to be the permanent director of the Federal Housing Finance Agency took a stepforward this week as the Senate Banking Committeeapproved the measure.

His nomination now goes to the full Senate where the timing of a vote is to-be-determined. Since Watt’s nomination two months ago, his candidacy hasn’t gained the support of a majority of Republicans, and agency investors remain skeptical.

Should Watt become the FHFA director, the potential for a Home Affordable Refinance Program eligibility date change is the greatest concern for investors, according to JPMorgan Chase’s (JPM) latest report. 

"Given the administration’s prior focus on this issue and a lack of strong political pushback, a date change under a new director is highly likely in our view," explained Brian Ye, analyst for JPMorgan.

He added, "To be sure, after a politically charged nomination process, a new director may be somewhat adverse to implementing major policy changes right away. Building in potential delays, a HARP date change, if it happens, may very well be a year-end event." 

This issue of changing the HARP date dominated the mortgage market discussion a few months ago.

Several options were explored by the administration at that time and the most frequently mentioned date was May 2010 — a one-year expansion of the HARP date.

While some investors have discussed the potential for an extension of the HARP date to the present, JPMorgan analysts view this possibility as unlikely for two reasons.

The date change would eliminate many representations and warranties for the post-2009 vintages, since HARP loans have very few characteristics to which the borrower attests. 

Additionally, the recent credit-transfer deals do not include HARP loans, and thus extending the HARP date to the present would make it more difficult to do more credit transfer deals in the future —part of Fannie Mae and Freddie Mac’s scorecard from FHFA, JPMorgan noted.

The bell of the 30-year coupon stack is the most exposed to the risk of a date change, the report explained.

An immediate change in HARP eligibility, if applied to the whole cohort, would mean that their speed could increase instead of decrease in the months ahead.

Furthermore, there is also the risk of the Federal Housing Administration following suit and moving its HARP date along with the FHFA.

The challenge at hand is the solvency status of the FHA insurance fund, JPMorgan analysts pointed out. 

The FHA HARP program was made possible by justifying the foregone revenue of grandfathering 'HARP-able' borrowers via a reduction in credit costs.

Presumably, the same logic applies, so this is seen as a possible hurdle for investors.

"Overall, we estimate that the odds of Mel Watt being confirmed are over 50%, and it is a high probability that once confirmed, he would advocate changing the HARP date," Ye explained. 

He concluded, "Consequently, we view the combined probability of a Watt confirmation and HARP date change as around 50%."

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