Making higher LTV loans TBA eligible brings pros, cons: Barclays
SIFMA held a call with members of the securities industry in order to discuss if mortgages above 105% loan to value should be able to trade in the To Be Announced bond market. Barclays Capital says the discussion may be an indicator of a commitment by the Obama administration to do a mass refinance program by expanding the Home Affordable Refinance Program. BarCap cautions "this could simply be about increasing operational efficiency for originators." Barclays analysts said the SIFMA discussion of higher LTV eligible loans raises "questions of whether this could be a harbinger of a surge in refinancing for high LTV borrowers (through an expansion of HARP) or whether this could simply be about increasing operational efficiency for originators." Currently, HARP accepts loans with LTV ratios between 105% and 125%, but these loans are not eligible for the TBA market. "Tax law requires that REITs have 75% of their assets in qualified real estate assets," Barclays analysts said. "Loans greater than 105% LTV do not fully qualify as real estate assets for tax purposes." The loans were specifically not accepted because of uncertain prepayment characteristics and limitations on a REIT's ability to purchase loan pools with larger LTVs. Among the government-sponsored enterprises, there are now $183 billion in loans classified as mortgages with LTVs in the 105% to 125% range. "If the TBA eligibility guidelines are expanded, this in effect would represent an upper bound of these high LTV loans that could eventually find their way into TBA," Barclays analysts concluded. Write to Kerri Panchuk.