Changes made late last year to the Home Affordable Refinance Program, or HARP 2.0, are finally starting to affect prepayment speeds for both conventional MBS and GNMAs, and more recent changes in the Federal Housing Administration's (FHA) mortgage insurance premium (MIP) are also creating uncertainty about the prepayment outlook.
While lenders began accepting applications for HARP 2.0 on Dec. 1, there was no impact in January's prepayment report. That changed in the February prepayment report, which showed clear signs of HARP 2.0 activity, with speeds on the credit-impaired coupons and vintages increasing more than expected.
The program's effect is expected to be more pronounced in upcoming prepayment reports, based on a combination of factors, including the fact that changes made to HARP in November became fully reflected in the GSE's automated underwriting systems in March. Broader servicer participation and increasing efficiency on the part of those servicers who are participating are also expected to impact prepayment speeds in the coming months.
One reason for the delay in the impact of HARP 2.0 on prepayment speeds, according to recent research from Deutsche Bank Securities, is that the reduction of the loan-level price adjustments, or LLPAs, did not occur until January.
In the Mortgage Bankers Association's (MBA) most recent report on application activity, which is for the week ending March 16, Senior Vice President of Research and Education Jay Brinkmann said that some of the biggest banks "are reporting that the HARP share of their refinances remained at about 30% last week."
And on March 19, Federal Housing Finance Agency (FHFA) General Counsel Alfred Pollard testified before the House Committee on Oversight and Government Reform that "Already many of the largest lenders are seeing tremendous borrower interest, and an increase in HARP volume in the upcoming reports is expected."
Credit Suisse analysts expect that the full ramp-up of HARP 2.0 will occur over the next two months.
Overall, Barclays Capital analysts think the HARP effect will likely be "lumpy," given that servicers are implementing the program on different timelines. "As a result, the HARP prepayment effect is likely to be uneven when viewed on a month-to-month basis," they said in a recent report.
While HARP 2.0 will certainly cause a modest pickup in prepayments for the eligible cohorts in coming months, the impact will be restrained by the fact that servicers have an economic disincentive to refinance loans they don't currently service.
As a recent article from Amherst Securities Group pointed out, different servicer refinancings require the servicer to gather more information about the HARP borrower. This information is not released from the reps and warranties on the new loan, as it is when a loan is refinanced by the same servicer.
In addition to discouraging participation in HARP 2.0, this results in a lack of competition that allows banks to charge higher rates to HARP borrowers than they might otherwise, the Amherst Securities article added. The report said that, should the FHFA and the government-sponsored enterprises ease the costs and risks for different servicer refinancings, there would be many more refinances with borrowers who are HARP-eligible.
FHA Initiates Its Own HARP
Further contributing to uncertainty about prepayment speeds, in early March, the Federal Housing Finance Agency announced that, beginning June 11, the FHA will lower its up-front premium to 0.1% and cut the annual fee to 55 basis points for streamlined refinancings. This applies to loans originated prior to June 1, 2009.
Currently, the FHA charges are 1.0% and 1.15%, respectively. The White House estimated that between two and three million FHA borrowers will be eligible to benefit from the lower fees and that the typical borrower will be saving around $1,000 per month.
However, these changes will not contribute to faster prepayment speeds until June and are even likely to bring about some slowing in March through May. In fact, Credit Suisse analysts expect voluntary prepayment speeds on the eligible GNMA cohorts to drop by around 40%-50% beginning in April as borrowers wait until June to refinance.