Here's Everything You Need To Know About Obama's New Housing Program, And Why It Could Actually Work

To the surprise of almost no one, a modified HARP (federal mortgage modification) program was unveiled today.  

The basic differences versus the initial HARP include:

  • Eliminating certain risk-based fees for borrowers who refi into shorter-term mortgages.
  • Removing the current 125% LTV ceiling for fixed rate mortgages backed by Fannie & Freddie.
  • Waiving certain reps & warranties that lenders commit to in making loans owned by the GSE’s.
  • No need for property appraisals when a reliable AVM model exists.
  • Extending HARP to year end 2013.

Goal:  Double the impact of the existing HARP program.  Since the beginning of HARP a few years ago, roughly 900k borrowers have refinanced through the program.

When: The lenders are expected to receive instructions by mid November with the likelihood that refi’s begin to take place in the December/January timeframe.

Who is Impacted:  5.5% & 6% pools of mortgages underperformed the most today after the news was out.  The borrowers in these pools have an approximate rate between 6%-6.5%.  With current coupon 30yr fixed mortgages in the low/mid 4% range, it’s easy to see the incremental benefit to newly eligible participants.

Barriers: The borrower must be current on their payments for at least the last six months in a row, and may have only had 1 late payment in the last year.

Who gets helped:  The major benefits IMO is tackling the issue of reps & warranties, which should cause more aggressive bank participation.  Secondly, borrowers above 125% LTV are now eligible.  These borrowers are obviously in the harder hit areas such as FL, CA, NV etc..

Who gets hurt:  Very simply, holders of premium mortgage bonds will experience a pickup in prepayments.   With 30yr 6’s trading at ~109, bondholders stand to lose 9 cents on the dollar for each dollar of prepayment.  Owners of these pools include banks, pension funds, insurance co’s, and fixed income mutual funds.

Conclusion: Very meaningful steps were taken to eliminate many of the bottlenecks of the original HARP.  If the administration is accurate, nearly 1 million households could benefit from a reduction of ~2% from their mortgage rate ($250/mo on a $200k house). In reality, is this just a net addition of nothing with the bondholders subsidizing this? Arguments can be made in either direction, but early indications show that there are a number of promising aspects of this program.

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