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RBS: HARP 2.0 allows just 17% of GSE mortgages to refinance

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The Federal Housing Finance Agency plan to revamp the Home Affordable Refinance Program will result in just 17% of Fannie Mae and Freddie Mac 30-year loans qualifying for refinancing, according to one Royal Bank of Scotland (RBS) analyst. Sarah Hu said there are some benefits of HARP 2.0, which is how bond investors refer to the plan, but also believes hurdles remain. "Apart from the usual capacity constraints, the lenders' voluntary participation in the new HARP may be relatively ineffective," she said. "Additionally, the FHFA is also encouraging refinancing into a short-term mortgage, which we don't think borrowers will consider without a significant payment reduction." Overall, the changes could expose 1.9 million new borrowers to HARP, Hu said. In addition, with the reps and warrants issue taken care of, it is likely mortgages will face "more exposures to conventional rate-refi risk," according to Hu. Mortgages interest rates of 5.5% and higher are likely to see increased prepayment speeds under the plan, resulting in a conditional prepayment rate of 5% to 7%, RBS said. Hu expects this change will mostly impact loans with 5.5% to 6.5% interest rates originated in 2006 to 2008. Terminating the 125% loan-to-value ratio cap will likely cause mortgages with 6% interest rates and higher to see only a slight 2% increase in the conditional prepayment rate. "We don't expect HARP 2.0 to have an immediate impact on short-term speeds, given the timetable for working out the details and implementing groundwork," Hu said. Amherst Securities said the clear intent of HARP 2.0 is to encourage borrowers to move into shorter loans and thereby reduce the risk to the GSEs. The firm cited an FHFA example of a borrower who has a $200,000 mortgage at an interest rate of 6.5% and a monthly payment of $1264. If the property is now worth $160,000, the borrower's LTV is 125%. The borrower can either refinance into a 4.5%, 30-year mortgage with a monthly payment of $1013, making it so he will not reach his balance of $160,000 for 10 years, or he can refinance into a 20-year loan at an interest rate of 4.25%, paying $1238 per month. In that situation, the borrowers balance reaches $160,000 in 5.5 years. The final scenario is a 15-year loan at an interest rate of 3.75%, with monthly payments of $1454 and the balance reaching $160,000 in 2.5 years. However, there are some other mortgage products that may see an uptick in originations from HARP 2.0. "Again, at the margin, if there is limited relief on the loan level pricing adjustments for 30-year loans, we would expect to see more 20-year origination as a result of this change," Amherst said. Write to Kerri Panchuk.

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