The recent nomination of Congressman Mel Watt, D-N.C., has left investors weary about the future state of the mortgage finance market.
The biggest concern is the recent revival of a push to change the Home Affordable Refinance Program eligibility date forward to capture recently made loans, said analysts for JPMorgan Chase in their latest report.
However, the odds of this data changing are dependent on a variety of issues, specifically the probability that a change to Federal Housing Finance Agency leadership even occurs at all.
Furthermore, the probability that the new current acting director — assuming it’s Watt — would then move to change the date.
"We would estimate that the odds of Mel Watt being confirmed are at least 50%," JPMorgan (JPM) analysts explained.
They added, "In fact, it may be more of an issue of timing and/or the willingness of the administration to provide a government-sponsored enterprise reform plan."
Meanwhile, given that Watt was nominated by the Obama Administration, and that the administration appears to be in favor of changing the HARP eligibility date, it’s likely that Watt would also support such a change, the report said.
"If the odds of this are 60-70% hypothetically, then there could change — up to 70% change of a new director, times a 70% change he would support a change," the analysts noted.
To be clear, these odds are extremely difficult to determine and the timing is unclear as well on a new director’s potential desire to examine the issue, and the administration’s efforts to purse broader legislative changes on refinance programs.
Nonetheless, JPMorgan analysts’ point is that there is "clearly a non-zero change that the HARP eligibility date would change and that these odds have increased significantly in the past few months."
For instance, the effect of changing the HARP cutoff from May 2009 to May 2010 would save borrowers about $5 billion per year by refinancing at today’s rates, compared with roughly $25 billion that could be saved annually by letting the pre-May 2009 loans continue to HARP, according to the report.
"Clearly the market has been sensitive to rumblings of a date change. This part of a longer-term pattern in the mortgage market that has persisted for some time," the analysts explained.
For instance, whenever news breaks that the HARP date may be changed, the roll market has reacted, pricing in faster speeds.
In general, any type of date change to HARP eligibility is clearly enough to 'pollute' the market and lends support to the strong investor reactions floating throughout the market.
"We remain underweight higher coupons as the risks remain difficult to quantify — despite our efforts here — and headlines play out in D.C.," the analysts concluded.