HARP Refinancings fall to 297,000 in Q4

HARP Refinancings fall to 297,000 in Q4 PART 1 OF 1

HARP Refinancings fall to 297,000 in Q4

HARP Refinancings fall to 297,000 in Q4

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Fannie Mae and Freddie Mac refinanced 297,000 loans in Q4 under the Home Affordable Refinance Program

The Home Affordable Refinance Program was instituted in 2009 to allow homeowners with negative equity to take advantage of the low interest rate environment. Before HARP, lenders would not refinance a home with a loan-to-value ratio (LTV) above 1. When the program was introduced, the limit was was 1.05; it was subsequently bumped to 1.25 and then eventually eliminated. The elimination of the LTV constraint explains the large jump in HARP refinance activity beginning in 2012.

To be eligible for HARP, the borrower must have a loan guaranteed by Fannie Mae or Freddie Mac, have a LTV ratio above 80% and be current on their mortgage. The program was designed primarily to help people who wanted to stay in their home, had adjustable-rate mortgages where they could afford the initial “teaser” rate but would not be able to afford the payment once the mortgage adjusted upward. The program had the effect of giving them a new 30 year fixed rate mortgage at the initial teaser rate.

HARP program is becoming a bigger part of the refinance market

In Q4, HARP refinances accounted for 22% of all refinance activity in conforming (Fannie Mae or Freddie Mac) loans. In the hardest hit states (Florida and Nevada), they accounted for over half the refinance activity. The Obama Administration is considering expanding HARP in order to help more people and is also considering principal modifications for conforming loans. The net effect will be further policy measure to allow underwater homeowners to take advantage of the Fed’s quantitative easing efforts.

Implications for Mortgage REITs

Refinancing activity affects prepayment speeds, which is a critical driver for mortgage REIT returns. Prepayment speeds are due to the fact that homeowners are allowed to pay off their mortgage early, without penalty; when interest rates fall, those that can refinance at a lower rate will do so. This is something that is good for homeowners, however, it isn’t necessarily a good thing for mortgage lenders, especially REITs. When homeowners prepay, the investor loses a high-yielding asset and is forced to re-invest the proceeds in a lower rate investment. This means lower returns going forward. A rise in prepayment speeds could be negative for REITs like American Agency Capital Corp. (AGNC), Annaly Capital Management, Inc. (NLY), Hatteras Financial Corp. (HTS), CYS Investments, Inc. (CYS), and Capstead Mortage Corporation (CMO).

The other implication is that REITs may take capital losses on some of these mortgages. Ordinarily, a government guaranteed mortgage with a coupon rate well above market rates will trade above par, as long as the loan to value ratio was over 1, because it couldn’t be prepaid. If a REIT has a mortgage marked at a premium to par and the loan refinances, they take a capital loss.


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