Senator Barbara Boxer of California held a press conference last week to support the passage of Helping Responsible Homeowners Act, which aims to help non-delinquent, existing borrowers refinance at a lower rate through the elimination of Loan-Level Price Adjustments (LLPAs) and qualify borrowers with LTVs higher than 125%.
The proposed legislation also effectively seeks to expand the Home Affordable Refinancing Program (HARP), which has a maximum 125% LTV limit.
The bill, originally introduced on Jan. 25, has only been referred to committee and is still in the early stages of the legislative process. It has limited potential for increasing refinancing activity, according to reports by both Barclays Capital and Bank of America Merrill Lynch.
Barclays analysts do not anticipate the proposal to be enacted into law, based on the previous failure of similar legislation, such as a plan proposed by Dennis Cardoza (D - CA).
The bill also does little to tackle the central issue at hand, which, according to Barclays analysts, is increased lender indemnification risk that makes these firms tighten their underwriting.
The focus on the elimination of LLPAs and LTV limits, analysts believe, does not address the potential putback risk that lenders face when refinancing high-risk borrowers.
Analysts said that since rep and warranty risk effectively resets when originators make new loans, without addressing this issue, it becomes unlikely that lenders will expand their credit guidelines and they will likely remain focused on higher FICO and primarily lower LTV borrowers.
Barclays believes that the success of any legislation like this is dependent upon the inclusion of rep and warranty relief to originators to encourage them to ease lending standards to higher risk borrowers.
Meanwhile, BofA Merrill’s analysts stated that the most necessary component of the U.S. economy is “reliance on, not help for, responsible citizens.” They said that due to the HARP’s and Home Affordable Modification Program’s lack of success, it is impractical to implement legislation such as this.
Analysts pointed out that if the loans with an LTV greater than 125% were allowed to proceed to delinquency rather than refinanced, the borrowers would be eligible for HAMP anyway.
BofA Merrill maintained its recommendation that a public-private partnership that finances direct real estate investing is the best option to alleviate pressure coming from the distressed housing inventory.
Analysts also believe that IO and premium MBS cheapening resulting from the Boxer proposals offer attractive investment opportunities.