The Department of Housing and Urban Development (HUD) recently issued guidelines for the Home for Homeowner (H4H) program. This was part of the Housing Bill that was signed into law in July that authorized $300 billion for the FHA to use to insure and refinance delinquent mortgage loans.
To be eligible for the borrower to participate, the home subject to the refinancing benefit must be their primary residence, the existing loan must have been originated before January 1, 2008, the borrower must have made at least six payments, the monthly payments represent over 31% of the borrower's monthly income as of March 31, and they cannot pay their mortgage without help. The maximum amount of the new 30-year fixed mortgage loan is $550,440.
In addition, the servicer or lender must agree to the participation as they will be required to take a loss on the loan as the new Federal Housing Administration loan can be no more than 90% of the new appraised value, including any financed Upfront Mortgage Insurance Premium (UMIP).
Assuming the servicer/lender agrees to the participation and the refinancing goes forward, they would be able to share in future home price appreciation upon sale or future refinancing of the property.
This future appreciation will be passed through from HUD, which also will get a share of the appreciation. The result of this equity sharing is equivalent to a prepayment penalty notes JPMorgan in research. In year one, the forfeited equity share is 100% and declines to 50% after year five.
According to JPMorgan Securities analysts, this is equivalent to 11% of the loan amount in year one and down to 6% in year 6. "These are multiple times the penalty amounts found in typical loans," analysts said.
As a result of this "prepayment penalty," these loans should have a convexity profile that is superior to any in the agency MBS universe, analysts said. They expect that prepayments on these H4H loans will likely only come from delinquencies and defaults. They add, however, "Re-defaults could be quite significant, establishing a high baseline prepayment speed. However, the sharply reduced option cost should more than compensate."
JPMorgan calculated the fair value for 6% G2 FS pools at 1-1/2 points above TBA using the assumptions: option cost is reduced by half, 30 CPR for life and 80 basis point zero volatility spread. They acknowledge the market will charge a significant liquidity premium, especially in the current environment, but they "will represent a fundamentally attractive asset class in the agency MBS sector."
The H4H loans will be securitized under GNMA II "FS" custom pools. The "FS" designation was created late last year following the government"s initial FHASecure program that was targeted to help delinquent borrowers.
Originations have been relatively light under that program, but it should pick up with the H4H program and help improve liquidity.