HARP 2.0 Helping Mortgage Industry Despite Europe Crisis
Mortgages are doing pretty well despite wider spreads in the risk-off trade. Higher coupons are moving lower on the heels of HARP Version 2.0 and continued fed buying in lower coupons. Europe still appears to be on the fast track towards disaster and yesterday Fitch warned that further Euro-zone deterioration puts the US banking outlook at risk. Right now Fannie 3.5s are down just 2 tics on the day and the DOW is down 72 pts. I’ve had a chance to look through the secondary components of the Fannie/Freddie announcements on HARP 2.0 and here are some bullets:
• LLPAs drastically reduced (completely eliminated on 20yr terms and shorter, >20yr terms are now capped at +75%)
• For Freddie: Incentives for servicers to refi >80 LTV loans by removing rep and warrant exposure
• For Freddie: <80LTV, the reps and warrants from the original loan roll with the refi’d loan
• For Fannie: the document specifically removes the lender’s responsibility for reps and warrants on the original loan if DU is used; also significantly reduces the rep and warrant exposure on the new loan if DU is used
• LTVs up to 105% remain TBA eligible, meaning from a secondary perspective will be priced the same as conventional loans. LTVs between 105 and 125 remain non-TBA eligible and will be securitized under their own tickers (CV and CQ). These high LTV pools w/higher coupons (4.5s for example) continue to trade at a premium due to assumed lower prepayment speeds
Keep in mind these points just focus on the guidance from Fannie and Freddie and the bond markets. Lenders and conduits will layer in their own overlays and risk-based pricing as they deem necessary.