With Sen. Harry Reid, D-Nev., able to change the voting threshold needed for getting administration nominations passed the U.S. Senate, the Federal Housing Finance Agency may soon find itself with a new leader in Rep. Mel Watt, D-N.C.

Such a shift would create substantial changes for the Home Affordable Refinance Program and for investors impacted by HARP-eligibility requirements.

Sarah Hu, an analyst with Royal Bank of Scotland (RBS), said a Watt reign may increase the HARP-eligibility rate from 5% to 7%, while pushing conditional repayment rates much higher.

When Reid moved the presidential nominee voting threshold from 60 votes to 51 Thursday, he essentially killed any Republican filibuster efforts, which were expected to impact the Watt confirmation vote. It's expected Democrats in the Senate can easily get over the 51-vote threshold.

A Watt replacement for FHFA Acting Director Ed DeMarco has long been thought to be an initiative that would create a more politically driven FHFA – and one committed to principal reductions.

Hu says if the cut-off date for HARP eligibility is moved from June 2009 to June 2010, overall HARP eligibility is expected to rise, having its greatest effect on coupon 4.5s and 5s with their eligibility rates likely increasing from 3% to 8% and 7% to 20%, respectively.

Hu said this could lead to a 3 conditional prepayment rate increase for 4.5s and a 9 CPR increase for 5s.

"Higher coupons (6s and above) would be largely insulated from the cut-off date change as most of them were originated prior to 2009," she said. But if the HARP eligibility rate is moved to June 2011, eligibility for 4.5s would grow from 3% to 14%, while 5s would move from 7% to 26%.
"We would expect speeds on 4.5s and 5s to rise by 7 and 13 CPR respectively," Hu noted.

And if the eligibility rate is moved to December 2012, coupon 4.5s and 5s would feel the impact with eligibility rates moving from 3% to 17% and 7% to 27%, respectively.

In addition, 3% to 5% of higher coupons would face HARP-extension risk.