Recent changes to the Home Affordable Refinance Program are in line with mortgage market expectations, analysts at Keefe, Bruyette & Woods said. Fannie Mae and Freddie Mac provided details Tuesday on their expansion of HARP. The primary changes relate to removing the 125% loan-to-value cap, reduction of loan level pricing adjustments and representation & warranty waivers. However, the 105% maximum LTV limit for adjustable-rate mortgages will remain. Real estate investment trusts investing in Fannie and Freddie mortgage-backed securities with hybrid adjustable-rate mortgage portfolios will not be impacted by HARP because hybrid ARM borrowers with LTVs more than 105% will continue to face obstacles in using the program, KBW analysts said. They also said the Federal Housing Finance Agency's estimate of less than 1 million loans worth roughly $150 billion to $175 billion by the end of 2013 is reasonable for HARP 2.0. "While this could increase HARP volume by 10% a year in 2012 and 2013, the dollar amounts are moderate so the impact on agency MBS holders should be limited," according to  the KBW analysts. Loan level pricing adjustments are currently capped at 2%. With the new HARP changes, these fees will be reduced to zero for fixed-rate mortgages with amortization of less than or equal to 20 years, and 75 basis points for ARMs and FRMs over 20 years. For a 30-year, fixed-rate mortgage borrower refinances into the same loan, the decline would be 75 bps, which equates to about 15 bps annually.
Freddie and Fannie mortgages with LTVs less than 80% will, in many cases, face more frictions to refinance than those higher than that ratio. This will be more true of Freddie than Fannie, said analysts from Amherst Securities Group. In Fannie's case, they say, the loan level pricing adjustments could be higher on the non-HARP refis. And in Freddie's, the LLPAs could be higher on the non-HARP refis with no relief on the old reps and warrants. For Freddie borrowers with LTVs above 80, certain rep and warrant requirements will be waived for same-servicer refis. The waivers are broader for Fannie Mae and apply to originators who use Desktop Underwriter Refi Plus. Originators under HARP are relieved of any of the reps and warrants of the original loan and only need to rep to a few items such as a lack of fraud.
Mortgage volumes increased in the third quarter, driven by increased refinancing activity as rates fell. Healthy gain-on-sale margins in the quarter were driven by increased loan demand and industry capacity constraints. Strong mortgage banking income for many financial institutions during the quarter was partially offset by elevated rep and warranty costs, which KBW analysts expect to continue, driven by agency repurchase requests. Falling interest rates also led to declines in the value of mortgage servicing rights, but most companies were able to offset this through gains on investment hedges. Mortgage banking activity expanded 35% in the third quarter. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.