The recent announcement of a new initiative by the Federal Housing Finance Agency to streamline modifications for eligible borrowers is great news for distressed homeowners, but the impact on investors is minimal at best.

The initiative is expected to leave a fairly small impression on mortgage-backed securities, () (JPM) said in its latest report. 

Specifically, the loans must be first liens, between 90 days and 24 months delinquent, at least a year old and with a loan-to-value ratio greater than or equal to 80. If a borrower meets the criteria, they will be placed into a 3-month trial period and once the trial is satisfied, the mod will become permanent.

However, Fannie Mae and Freddie Mac buy out loans that are delinquent for 120 days already, so this program will impact only those securities with loans that are between 90 days and 120 days delinquent, the report said.

"We expect it would take some time to implement the modification, which would probably bring the loans to 120 days or more delinquent, in which case they would have been bought out anyway," said analysts Matthew () and Nicholas () of () Chase. 

Meanwhile, the size of the eligible market is relatively small. 

For instance, only 0.67% of the 2006 to 2007 5.5s coupons are currently 90-days delinquent, and the actual take-up rate by borrowers will be below 100%.  Thus, lower coupons have a negligible amount of loans eligible for the program.

"We doubt this will provide much moral hazard incentive for borrowers who are 30-60 days delinquent to go 90-days delinquent, given that other incentive programs (such as HAMP) are already available to borrowers. Interestingly, the new streamline program does not require borrowers to document hardship, which might make it marginally more attractive," the analysts said.

They added, "Nevertheless, the new modifications will still negatively impact borrower credit scores, and so we doubt that this provision will have a significant impact from a moral hazard perspective."

The timing of this change is also interesting, given the FHFA recently said it would try to sell $30 billion of credit risk into the market this year.

"It is unclear what this change would do to investor demand for these credit tranches, given that there is no empirical data yet on the programs impact on defaults," the analysts concluded. 

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