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Why HAMP modifications continue to increase homeowner equity

Brent Nyitray, CFA, MBA - Author

Nov. 20 2020, Updated 11:09 a.m. ET

The Home Affordable Modification Program (or HAMP) is one of President Obama’s programs to relieve distressed homeowners

The Home Affordable Modification Program (or HAMP) lowers borrowers’ monthly payments by reducing their interest rate or extending the term of their loan. So far, the Federal Housing Finance Agency (the FHFA) has resisted allowing principal reductions. It will, however, encourage investors and servicers in non-government mortgages to reduce principal. The intent of the program was to stabilize the housing market and prevent avoidable foreclosures.

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To be eligible, the homeowner must be employed, have obtained their mortgage prior to January 1, 2009, have financial hardship, and be able to afford the reduced payment. The FHFA also included an unemployment program that reduces a borrower’s payment to 31% of income or suspends payment altogether.

As of February, more than 1.3 million people have received a permanent modification to their mortgage.

Highlights of the February Obama Administration Housing Scorecard

Trial HAMP modifications decreased to 12,000 from 13,900 the prior month. Permanent modifications rose to 15,700 from 13,500. Since the beginning of Obama’s programs, aggregate home equity has increased almost $3.9 trillion as the housing market has rebounded.

Impact on mortgage REITs

Any mass principal forgiveness or refinancing program will mainly affect agency REITs, like American Capital (AGNC), MFA Financial (MFA), and Annaly (NLY). Agency REITs don’t bear credit risk like the non-agency REITS Redwood Trust (RWT) and Invesco (IVR) because the loans are guaranteed by the government. That said, an absence of credit risk doesn’t mean they won’t take losses. Many underwater homeowners have above-market interest rates on their mortgages and are unable to refinance because lenders won’t underwrite a mortgage with a loan-to-value ratio over one—unless it’s in the context of the Home Affordable Refinance Program (or HARP). This means that an MBS (mortgage-backed security) with a 6% government-guaranteed coupon rate will trade significantly above par since most of the loans can’t be refinanced. If the government pursues a mass principal reduction, those loans will reduce to a loan-to-value ratio (or LTV) of one or below, which makes them all eligible for refinancing.

The Obama Administration is considering expanding the HARP program to include late 2009 and 2010 vintages. This means agency REITs will face a massive increase in prepayment speeds. Their higher-yielding mortgage-backed securities will drop in price as the market factors in higher prepayment risk. They will also face higher reinvestment risk. A mass principal write-down or major expansion of HARP would be negative for mortgage REITs.


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