Three bills intended to increase homeowner refinancing were introduced this week by Democratic senators — bills that HUD Secretary Shaun Donovan said are “a win, win, win and something that we think can gain real bipartisan support very quickly and get passed.”
The bills, if passed, would complete President Barack Obama’s plan for refinancing, which he outlined in the State of the Union Address.
In 2009, the Administration announced the Home Affordable Refinance Program to assist responsible homeowners refinance their mortgages. In its first two years it helped nearly 1 million homeowners refinance. However, eligibility regulations and costs associated with the program kept it from having a wider impact.
As a result, in October the President announced that Fannie Mae and Freddie Mac would work with lenders to remove barriers, allowing more families to benefit from refinancing their mortgages at historically low rates.
Speaking on a conference call Friday, Donovan heralded a bill introduced this week by Dianne Feinstein, D-Calif., that encourages homebuyers who don’t have a Fannie Mae, Freddie Mac or Federal Housing Administration-backed loans to refinance.
“There are about 3.5 million families who are doing the right thing by paying their bills, current on their mortgages, but because they’re underwater and have a private-label securities loan, they have been locked out of refinancing,” Donovan said. “We want to expand refinancing to those families.”
And in an attempt to accelerate the rebuilding of homeowner equity, Senator Jeff Merkley, D-Ore., advanced a bill in which Fannie and Freddie cover the closing costs for some homeowners who are current on their mortgage and seeking to refinance into a 20-year loan term or shorter through HARP. It will save homeowners an average of $3,000 a year.
“One of the great powers of low interest rates isn’t that they can just help boost consumer spending, it also means that most homeowners can take savings from lower interest rates and plow it back into paying back their mortgage,” Donovan said. “They can keep their payments the same, but accelerate the amount of principal they’re paying every month and get back above water much faster.”
Mortgage applications are surging from the refinancing boom.
Refinancing activity edged up 1.3% for the week as the conventional refinance index rose 1.8% and the government refinance index fell 2.3%, according to the Mortgage Bankers Association. Refinancing activity made up approximately 72.1% of all mortgage activity for the week, mostly flat from 72.6% the week before.
Donovan also touted a bill introduced this week by Sens. Robert Menendez, D-N.J., and Barbara Boxer, D-Calif., that removes a minimum requirement for mortgage LTV through HARP.
“What we have here is a series of 'We can’t wait' actions that the President has taken under his own authority that has seen real early success," Donovan said. "And there’s now evidence in an enormous jump in refinancing as a result of the actions the president took last fall.”
Ed Canaday, an global banking & markets analyst at the Royal Bank of Scotland (RBS) said in an email the Menendez-Boxer bill is unlikely to pass Congress.
However, if successful, investors should be aware of its potential impact on prepayments and valuation of HARP pools.
"Clearly, extending the HARP cut-off date allowing for "re-HARPing" could have a great impact on prepayments for certain coupons," he said. The "re-HARPing" effect may result in worse convexity and lower dollar prices for some MHA and CQ/U6 pools."
"Meanwhile, this could discourage many lenders from actively participating in the HARP program," he added, "as HARP business could become less lucrative if rising prepayments lead to lower prices for pools backed by HARP collateral."
On Friday in Reno, Nev., President Obama discussed the impact of his refinancing changes announced in October.