The latest version of the government's Home Affordable Refinance Plan, or HARP 2.0, failed to "hit its full stride" in March as prepayment speeds remained well below projections, analyst Sarah Hu with the Royal Bank of Scotland (RBS) said.
Prepayment speeds generally increase as more borrowers refinance existing mortgages, but Hu found speeds from March fell short of most estimates when considering HARP 2.0 was supposed to significantly buoy mortgage refinancing activity.
The conditional prepayment rate on Fannie Mae's 30-year, fixed-rate mortgage-backed securities grew 4% to 25.8 CPR in March, while the same rate on Freddie Mac's 30-year MBS inched up 6% to 28.2 CPR, Hu said. RBS expected at least a 15% increase in the conditional prepayment rate.
"The muted speeds indicate that some key factors are still hindering borrowers' participating in the HARP Program," Hu said. "Despite Fannie Mae and Freddie Mac updating their automated underwriting system last month, some big banks are not refinancing loans that they do not already service under HARP 2.0."
Fannie Mae's AUS, Desktop Underwriter, was updated the weekend of March 17 to include the expanded HARP specifications. Freddie Mac's AUS, Loan Prospector, was significantly updated in mid-March as well and will be updated again in mid-April to help facilitate HARP 2.0 refi activity, according to the government-sponsored enterprise.
However, Hu says there are several other factors keeping HARP refinancings somewhat subdued. The first is the fact financial firms are, in some cases, placing their own requirements for HARP 2.0 on top of those already initiated by the government. Private mortgage insurers also are not fully onboard with parts of HARP, making it harder to push the refinancings forward.
Still, Hu does not see HARP on the same path over the next couple of months.
"With the automated version of the underwriting system, we should continue to see an increase in HARP refinance activity," Hu said."Thus, the strong showing of HARP 2.0 in February may not be just a one time event. The program could still make a dent with underwater borrows and have meaningful impact in higher coupon speeds, amid the pace of its implementation that could be characterized as gradual rather than rapid."