Posted on Friday, September 10, 2010
Tuesday marked the start of a new, targeted government housing program designed to help the millions of Americans who, in the wake of plummeting property values, owe more on the mortgage than their home is worth. The government’s mortgage insurer, the Federal Housing Administration, is at the center of the new program for underwater homeowners. FHA is now offering certain non-FHA borrowers with negative equity, who are current on their existing mortgage, the opportunity to refinance into a new FHA-insured loan, as long as their existing lien holders agree to write off at least 10 percent of the unpaid principal balance on the first mortgage.Officials have suggested that between 500,000 and 1.5 million underwater borrowers could receive a new, more sustainable mortgage through the FHA Short Refinance option. But analysts say because participation in the program is voluntary and requires the consent of all lien holders, they expect significantly smaller results. Barclays Capital estimates that the new FHA refinancing program will only reach 200,000 to 300,000 homeowners.The latest data from CoreLogic shows that some 11 million borrowers were in a negative equity position as of the end of June. That equates to 23 percent of all U.S. residential properties with a mortgage.
The FHA Short Refinance option, originally announced in March, is aimed at providing some mortgage relief to homeowners whose biggest investment – their home – has left them with a huge equity gap because their local markets saw declines in home values. Homeowner advocates and even government watchdog groups have been imploring the administration to tackle the underwater mortgage issue for some time now. Studies have shown that severe negative equity can be a strong default trigger. By getting in front of the problem early with a solution, while these homeowners are still current, the administration is hoping to fend off a new round of foreclosures.To facilitate the refinancing of new FHA-insured loans under the program, the U.S. Department of Treasury says it will provide incentives to existing second lien holders who agree to full or partial extinguishment of the liens. The government has earmarked $14 billion in Troubled Asset Relief Program (TARP) funds to support the program
Rock-bottom interest rates, less-than-encouraging economic data, and stubbornly slow prepayment speeds have kept mortgage-backed securities (MBS) investors worried about what the government could do next to prop up the ailing housing market, according to Barclays Capital, with the latest concern stemming from a recent announcement by Freddie Mac. Dated August 2010, a new servicing guideline from the GSE details a streamlined refinance program that allows its servicers to offer an “easy refinance” option with “LTV [loan-to-value] ratios up to 95 percent.” Freddie says it will also allow servicers to roll all closing costs, financing costs, and prepaids/escrows into the new refinanced mortgage, with an added incentive of up to $2,000 cash back to the borrower.According to Barclays, some market participants have interpreted this as a fresh step undertaken by the GSE that could significantly boost loan prepayment speeds in the coming months, but the firm’s analysts say, “A close look reveals that this is yet another false alarm. This program is everything but new.”
While sibling GSE Fannie Mae discontinued its streamlined refi program in April 2009, Freddie has always had a streamlined refinancing program, and its current form has been around since at least early 2009, with minor tweaks here and there, Barclays explained.In other words, the research firm says, the impact of this program has already been fully reflected in actual prepayments during the past year. (When a mortgage that has been pooled is refinanced, it results in a principal “prepayment” to the investors. With today’s deteriorated market conditions, such prepayments can mean a significant loss for the investor.)
Barclays says the fact that prepayment speeds have been so slow “says a lot about how ineffective [Freddie’s] program is in terms of getting people to refinance.”
The firm’s analysts argue that a quick read of the factsheet for Freddie’s streamlined refi shows that the program still presents significant hurdles, including:
• Loans must be manually underwritten under the program.
• The program provides no relief on representation and warranty. In fact, any rep and warranty relief associated with the original loan no longer applies to the new loan.
• The lender retains all the representations or warranties for the current market value of the property, which almost ensures that a full appraisal is obtained.
• The new loan is subject to standard loan level delivery fees, rather than the lower fees applicable for the Home Affordable Refinance Program (HARP).
• The program offers no relief on the mortgage insurance front, which means borrowers who have experienced home price declines are likely cut off from refinancing altogether or will see their mortgage insurance go up substantially in a refinance.
• The maximum allowable LTV under the program is 95 percent, so it does not help with underwater loans.
“These constraints explain why this program has yet to make a dent on prepayments,” Barclays said.
Some investors who buy GSE-issued securities have grown increasingly uneasy in recent months in anticipation of a new wave of government-ordered refis and ensuing losses for mortgage holders, but it doesn’t appear that such a spate is going to materialize.
According to Barclays, the Freddie Mac refi program that has since been touted “has not worked and should not work in its current form” to wield a surge in mortgage refinancing.
The only other new government refi initiative is the previously announced Federal Housing Administration (FHA) refinancing program for underwater borrowers, which is supposed to be up and running Tuesday, September 7.
Lender participation in the FHA program is completely voluntary and it requires the consent of all lien holders. As a result, analysts aren’t expecting to see significant volume. DSNews