Policy changes including the potential extension of the government's Home Affordable Refinance Program (HARP) in 2011 to all GSE loans can result in faster prepayment speeds on agency mortgages, said Barclays Capital in its 2011 outlook report.
According to Barclays analysts, an extension of the HARP program to every GSE loan will instantly increase the prepayment speeds of 2009/2010 production by 30% to 100%.
Prepayments have been projected to remain slow in 2011 as a result of the diminished borrower responsiveness to the low mortgage rates, incrementally tighter underwriting, and persistent origination capacity issues. If the HARP expires on its scheduled end date of June 20, 2011, then prepayment rates for pre-March 2009 FNMA origination are expected to fall lower than rates in 2010, Barclays analysts explained.
The most affected paper, according to Barclays, will be 2008 to March 2009 origination 4.5- to 5.5-year average life, which should slow sharply and collapse into those of late 2009 and 2010 production. Higher coupons originated in this period and 2007- and-earlier production should experience only a marginal slowdown.
But the slow recovery in the housing market and the noticeable success of the HARP program this year could result in the program being extended beyond its 2011 expiration date. The program's extension will dramatically increase speeds and pose a real risk to prepayments in 2011.
If the HARP expiration date extends by another year with no other changes, it would maintain the prepayments at the same level as 2010. However if the program is extended by a year and the GSEs eliminate the origination date requirement for HARP eligibility (before March 2009 for Fannie Mae and May 2009 for Freddie Mac), this would increase the speeds of 2009-10 coupons by 30% to 100%.
"HARP eligibility as prescribed by the Treasury does not have a cutoff date, and the fact that Fannie and Freddie have different cut-off dates indicates that the date itself can be changed or eliminated," Barclays analysts said. "We think there is a material chance that it could happen. Everyone should stand to gain from such a change: The GSEs will be praised while clipping more fees from increased HARP origination; borrowers will benefit from it; and lenders will be happy to see their origination volume increase without incurring extra credit risk."
The Federal Housing Finance Agency has the authority to make the changes for eligibility and, according to Barclays analysts, there hasn't been much political or industry resistance to the possible changes. Since about a third of all GSE loans are originated after the current HARP cut-off date, analysts said that this fact increases the pressure of expanding the HARP program to all borrowers.
"In fact, some contend that HARP has failed because it is being used as a streamlined program to refinance pristine-quality borrowers rather than help struggling homeowners and therefore that the focus should be on fixing existing problems rather than expanding it to everyone," Barclays analysts said.
However, they said that it can be argued that since there is a streamlined program it should be made available to everyone. There is no justification, analysts said, for the differences in access to credit between borrowers with loans originated in March 2009 and those in April 2009 considering that these mortgages are almost identical in terms of credit quality.
"Since there is no cost but many benefits to such a change, we think there is a fair chance that it could be implemented in 2011," analysts said.
