by Travis BeMent on January 27, 2012
As details continue to leak about HARP2, I am concerned about some things I learned this week. Fannie Mae published its “Loan Level Pricing Adjustment” matrix. Before anyone gets too excited- they have not published rates- only an index they will use to price loans. There are adjustments for total loan-to-value, credit score, occupancy status, loan term and subordinate financing. All of those factors WILL BE considered in determining the rate for the new loan. There is a common belief (the public and the media) that those factors would not affect rate- that’s not going to be the case. Fannie Mae will place a cap on the fees it will charge to lenders when they buy the loan- but the matrix allows significant upcharges. In short, lenders at the wholesale level will be able to make a significant spread on these loans. Will they try and make that spread? Will competition for this business keep rates down? I certainly hope so… For this program to help as many as intended, we need rates to be low. If pricing on these loans does not come in the low 4% range, it simply won’t be enough to provide a real benefit.
by Travis BeMent on January 25, 2012
Today, the Federal Reserve announced that they would be keeping rates at their current levels through at least the end of 2014. The decision to leave rates alone, combined with the duration of the commitment (almost 36 months) will help keep short term rates in check. In prior announcements, the Fed has not ever committed to such a long term promise. The announcement is seen as positive one for the economy as a whole which should help keep borrowing costs down for businesses.
by Travis BeMent on January 24, 2012
In November, the House Committee on Oversight and Government Reform formally requested that Federal Housing Finance Agency (FHFA) answer specific questions on principal reduction for government owned or secured loans. The current FHFA Director Edward J. DeMarco responded late week. In short, there was no question that the agency does not feel that principal reduction will benefit taxpayers. The FHFA feels, in short, that its’ role as overseer of the GSE’s prevent it from not only authorizing these reductions but advocating them as well. The belief is that reductions will ultimately harm the portfolio that it manages. The consensus in the agency is that current Federal rules in place for borrowers (like HARP and HAMP) are sufficient to address the issues facing borrowers. In short, don’t expect the GSE’s to embrace principal reduction now or anytime soon.
by Travis BeMent on January 23, 2012
Like many other in the industry, I am bullish on HARP. So much so that I would estimate that if the program succeeds as intended, it could rescue the mortgage and real estate industries and significantly improve our overall economy. Imagine- over 40 million households potentially able to refinance for a lower rate. That would put hundred’s of dollars more into their monthly budget not to mention the impact on the mortgage and title industries. There is, however, the chance that just like other programs introduced, it simply might not work. Based on everything we have seen thus far, it seems unlikely that the program will be a total bust. There are chances that because of conditions beyond our control, the benefits may not be as substantial as first thought.
The biggest challenge affecting the HARP 2 program’s success or failure is going to be rates at this point. For those unfamiliar with the program requirements, borrowers must have loan with Fannie or Freddie in good standing that was opened prior to June 1, 2009. There will be no requirement for asset or income documentation and no appraisal required. Loans for second homes and investment properties as well as condominiums will all be allowed. With all of that in mind, it begs the question, are all loans equal? Should a loan for an investment condo carry the same rate as a primary residence? Even in terms of helping the most people possible, there has to be some sort of risk and therefore risk-based pricing applied to these loans. Fannie and Freddie seem to agree- although appraisals will NOT be required, the agencies will be applying an automated value program (AVM) to these loans to get an idea of loan to value on the new loan. With this being the case, it is almost certain that some sort of pricing matrix will be used. The level of rate adjustments will be the single biggest factor in how beneficial this program ends up being.
When the program was introduced, industry insiders were surprised. It seemed to address all of the shortcomings of HARP 1.0 and other relief programs. The reps and warrants were gone. What does that mean? In short, a mortgage lender is now graded on how a mortgage performs. If a mortgage company issues a loan that fails to perform (i.e. doesn’t pay), then they will have a mark against them. Make enough bad loans and you can lose your ability to make loans. It was a good way to make lenders accountable and reduce bad loans. But HARP 2 will lift this requirement for lenders. Since HARP 2 loans will be inherently risky, removing these reps and warrants are the only way lenders will participate in this program. Even with those changes, lenders are going to want to price in the increased risk on these loans. Make no mistake, lenders and investors want you to repay your loans over time- that’s how their investment works. They don’t want to foreclose (sorry media) and they don’t really want to make Fannie and Freddie pay. Risk is a huge question in this program.
Rates were up over the last week. A pricing adjustment hit Fannie and Freddie conventional loans (a gift from Congress) and the markets were volatile. Economic reporting continues to improve making Treasuries less desirable for investors. With less demand, expect continued rate pressure.
