There is an increased likelihood of a government action to spur refinancings, JPMorgan Securities analysts noted in a report released yesterday.

However, they think that the odds of a national mortgage rate or a mass loan modification program are remote, given that these are either infeasible or too expensive.

"The national mortgage rate has been discussed by market participants at times, but it is nearly impossible to implement," analysts wrote. "If the government set a, say, 4% rate, the government would have to be the lender because this rate is lower than where the priate sector would lend."

They added that this would require nationalizing the mortgage industry, which they don't believe is the intent of the government.

They also pointed out that the GSEs could modify loans down to a target rate in theory. But it is not clear that the GSEs can modify performing loans. More significantly, modifying loans would cause the GSEs to purchase these loans out of the pools, which would lead to their retained portfolios increasing considerably by trillions of dollars, JPMorgan analysts said. 

The most likely scenario, according to JPMorgan analysts, is making changes to the
Home Affordable Refinance Program (HARP) that could possibly involve an extension of the HARP dates to cover borrowers who are current in their mortgages.

They said that giving the borrowers the option "to HARP multiple times" would invite industry opposition and could clog pipelines with borrowers who might refinance several times for small savings.

In research released today, Bank of America Merrill Lynch analysts argued that the policy change should focus on boosting refinancings among the borrowers that can create the most default risk while incentivizing lenders to increase capacity and become more efficient.

Aside from helping at-risk borrowers, this policy choice would support the housing market, help heal the GSEs and the banking sector (by reducing the likelihood of defaults), and affect only a few coupons/vintages within the MBS market.

According to BofA Merrill analysts, any policy decision has to recognize the market dynamics and incentives of the various parties involved. If the incentives are not aligned, then any program
to increase refinancings will not be successful.

They suggested strategies that would achieve such a balance such as identifying the high-risk loans, re-underwriting loans and including policy incentives to boost competition and capacity.

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