Mortgage refinancings through the Home Affordable Refinance Program known as HARP increased 26% in the third quarter of 2010. Strategists for Fannie Mae
and Freddie Mac
investors, however, say the spike is likely to be short lived.
Fannie Mae and Freddie Mac loan modifications through HAMP increased 16% in the third quarter of 2010, according to Federal Housing Finance Agency
, which oversees the government-sponsored enterprises.
Overall, the spike remains muted as the Mortgage Bankers Association
refinance index remains near a multiyear low and Braver Stern Securities
reports that it would look for the December prepayment report to hit the high-water mark for prepayment speeds for this cycle. The MBA reported on Wednesday that refinancings accounted for 70.3% of all mortgage applications
for the week ended Dec. 24 and 71% for the last week of the year.
Expected rises in mortgage interest rates, however, do not bode well for future refinancings.
The 5.0% coupon remains on the 40 bps refinancing cusp given the 5.04% effective mortgage rate, which moves almost 45% of the 30-year mortgage universe out of the refinancing window.
"Many investors are total return in nature and the 5.0 coupon is going to prove very sensitive to small changes in interest rates with 4.5% now completely out of the money," said Scott Buchta head of investment strategy at the firm. "Prepayment speeds will slow higher up in the coupon stack, but to a lesser degree."
Aggregate Fannie 30-year prepayments slowed 5% month on month, according to analysts at Barclays Capital
. "The slowdown in overall speeds suggests that there is not much backlog left in the origination pipeline, and, therefore, there should be a sharp slowdown in speeds next month," they wrote in a note to clients.
Buchta adds that unless originators expand the credit window, the refinancing window will shut for many more borrowers than simple economics would indicate.
Currently 45% of the 30-year mortgage borrowers are currently out of the money from a rate point of view, with added fees prohibiting many marginal borrowers from refinancing their existing loans.
"It doesn't seem likely that banks will be looking to refinance marginal credit borrowers whose loans they did not underwrite in the first place because of uncertainties associated with reps and warrants,” he add.
The Barclays analysts also pointed to harsh realities that will lower the rate of mortgage refinancings. "While a significant easing of underwriting standards would lead to a rebound in speeds, the likelihood of that happening in 2011 is slim, in our view, because recent developments have been pointing to continued tightening," they said.
The latest examples include Fannie and Freddie's new increase to the loan-level delivery fees, the Federal Housing Administration's plan to aggressively pursue put-backs in 2011, and originators' raising the DTI and FICO requirements.
"Given this, it should take a while for underwriting standards to stabilize," they add. "Credit easing does not seem to be on the horizon yet."
Jacob Gaffney is the editor of HousingWire.
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