But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The Home Affordable Refinance Program permits homeowners with negative equity to refinance at today’s lower rates
The Home Affordable Refinance Program (or HARP) was instituted in 2009 to allow homeowners with negative equity to take advantage of today’s low interest rate environment. Before HARP, banks wouldn’t lend more than the home’s value. In real estate jargon, they won’t underwrite loans with a loan-to-value ratio (or LTV) greater than 1.0. So if a homeowner bought their home in 2006 with a 6.5% mortgage rate, they’d be unable to refinance if they owed more than the home was worth. The government created HARP with these people in mind. Since its inception, the HARP program has refinanced 2.5 million mortgages.
To be eligible for HARP, the borrower must have a loan guaranteed by Fannie Mae or Freddie Mac, have an 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 and who had adjustable-rate mortgages where they could afford the initial “teaser” rate but wouldn’t be able to afford the payment once the mortgage adjusted upward. The program gave them a new 30-year fixed-rate mortgage at the initial teaser rate. Homeowners can check if they have a Fannie Mae or Freddie Mac loan by checking the respective company websites or by checking with their servicer.
Mel Watt decides not to extend the eligibility dates for HARP
In the prepared remarks, Mel Watt said the amount of borrowers that could be helped by extending HARP eligibility dates was relatively small, so the agency woundn’t relax the timelines. However, they’ll target the approximately 750,000 borrowers who are eligible and would benefit from a HARP refinance. There’s always the skepticism from borrowers who suspect HARP is too good to be true, and the agency would target these borrowers and try to convince them that a HARP refinance is a good deal.
Implications for mortgage REITs
Refinancing activity affects prepayment speeds, which is a critical driver of mortgage REIT returns. Prepayments are due to the fact that homeowners are allowed to pay off their mortgage early without penalty. When interest rates fall, those who can refinance at a lower rate will. This is good for homeowners, but it isn’t necessarily good 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 Corporation (AGNC), Annaly Capital Management, Inc. (NLY), Hatteras Financial Corporation (HTS), CYS Investments, Inc. (CYS), and Capstead Mortgage 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 is over 1, because it couldn’t be prepaid. (Think about our example above with a person who took out a mortgage at 6.5% in 2006. That mortgage would be worth close to 110. If a REIT has that mortgage marked at 110 and the loan refinances, it will take a capital loss of ten points.)
© 2013 Market Realist, Inc.