Yesterday's Fannie Mae and Freddie Mac released further guidelines for the Home Affordable Refinace Program (HARP).

Amherst Securities Group analysts said that the release does not change their ealier estimate of constant prepayment rate (CPR) increases from the changes.

The 10 CPR maximum increase in the first year and five CPR in year two for the hardest hit cohorts (2006–2008 5.5–6.5s) remains "realistic," they said.

ASG analysts also stated that the additional guidelines were interesting for two reasons. There are only minor rep and warranty changes on different servicer refinances. There are also more frictions for loans with less than or equal to 80 LTV to refinance than for loans greater than 80 LTV, especially in Freddie Mac's case.

Meanwhile, BNP Paribas analysts expect upto a 7 CPR impact on 2008 FNMA 6s and upto a 4 CPR impact on 2008 FHLMC Gold 6s because of the changes.

In terms of rep and warranty changes, Fannie Mae is still offering the rep and warranty relief for same-servicer refinancing but has now included specific language on exceptions, including fraud, charter violations, etc. This should result in greater certainty to origination, BNP analysts said.

Meanwhile, Freddie Mac, which did not have any rep and warranty relief before, now included it for same-servicer refinacing. However, this only covers borrower eligibility. Because of this, BNP analysts believe that FHLMC Gold/FNMA swaps hold value, specifically in higher coupons.

Neither GSE provides rep and warranty relief for different-servicer refinancing.

Refinancing Options

Both agencies' mortgages with LTVs less than 80 will, in many cases, encounter more frictions to refinance than those above 80 LTV, according to ASG analysts. This will be more true for a Freddie Mac loan than a Fannie Mae mortgage.

In Fannie Mae’s case, the loan level price adjustments (LLPAs) can be higher on the non-HARP (less than or equal to 80 LTV) refinancing.

Meanwhile, on Freddie Mac mortgages, the LLPAs could be higher on the non-HARP refinance loans and additionally, there is no relief on the old reps and warrants.

Furthermore, the new 105 total LTV or TLTV and home-equity total LTV or HTLTV limit for Freddie Mac mortgages with a less than or equal to 80 LTV will make it harder for different servicers to refinance loans with a second mortgage. Servicers must now manually verify that the TLTV requirements have been met.

The level of friction in less than or equal to 80 LTV loans was not built into market pricing, according to ASG. This should cause higher coupon mortgages to trade better in general.

It might also result in higher coupon FHLMC Golds to trade stronger versus their FNMA counterparts. Analysts said that these effects were reflected in pricing Tuesday afternoon. They think that there will be more follow through in subsequent days.

BNP analysts said that the expansion beyond 125% LTV would probably have a slight impact given that such loans will not be securitized until June 2012. They added that the decreased credit fees will probably not transfer to the borrower to the same extent.

Meanwhile, they also added that October prepays showed the limited impact of increased moneyness on high premiums.

In terms of borrower solicitations, Freddie Mac and Fannie Mae are allowing lenders to solicit HARP greater than 80 LTV  borrowers on certain conditions.

This type of solication is allowed as long as it is aimed at both Fannie and Freddie borrowers, and it is meant for all eligible borrowers. It remains unclear how a lender can be certain to only target borrowers with greater than 80 LTV, and what happens if a solicited borrower is later determined to have a less than or equal to 80 LTV, ASG analysts said.

This seems to be more of concern for Fannie Mae because a new appraisal will almost always be needed. For Freddie Mac, a lender can potentially pre-screen borrowers using its HVE program, ASG analysts explained.

There was some speculation, according to ASG analysts, that changes will be made to the mortgage insurance procedures to make refinancing easier for loans with mortgage insurance. However, no changes were made on this front.  

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