HARP 2.0 Revisited: Pros and Cons of the Program

The Home Affordable Refinance Program (HARP) is a program specially developed for home owners whose houses have lost value in the last few years and have not managed to get a refinance mortgage.

The broad changes to HARP were outlined by U.S. President Barack Obama's administration on Oct. 24. However, the release of most of the technical details was delayed until Nov. 15.

If nothing else, HARP 2.0 will increase refinance volumes over the next six months, extending the current mini-refinance boom into mid 2012. We believe that this will benefit mortgage originators, especially smaller originators well positioned to pick up market share, said Edward Mills, an analyst at FBR Capital Markets.

The final number of loans refinanced remains a debatable point, with most estimates ranging from 900,000 to 1.6 million. Ultimately, that number will depend on the participation rate. Mills said his analysis finds more than 6 million loans eligible for participation, representing a potential refinancing of roughly $930 billion.

Mills explored the reactions received from his industry and Washington contacts since the final details of the program were announced on Nov. 15.

The Mortgage Bankers Association currently estimates roughly $900 billion of origination in 2012. Should HARP 2.0 achieve its target of 1 million additional loans, this could increase refinancing by about $140 billion to this number, to about $1.1 trillion, with most of the increased volume occurring in the first half of 2012.

With expectations that smaller servicers and originators will be the most aggressive in participating in this program, coupled with the market share shift Mills has seen in the past year as part of the de-consolidation of the mortgage market, he believes small to mid-sized originators are best positioned to see a meaningful benefit.

Mills said his analysis showed there are more than 6 million loans that could be eligible for HARP 2.0 and that for this program to exceed the top expectation of 1.6 million refinanced loans, the program would need to see close to a 30 percent participation rate.

Conversations with industry contacts have led Mills to believe that the most important factors in determining whether or not this program exceeds expectations will be the participation of large servicers (especially Bank of America) and the appetite for HARP 2.0 bonds.

Mills said the program is primed for participation from borrowers with low interest rates and fees; servicers have received relief from representations and warranties.

In addition, the analyst feels there is no shortage of critics of the HARP 2.0 program. Industry and Washington contacts have questioned whether the low end of the estimates will be met.

He also said the contacts pointed to the lack of a truly streamlined process, continued questions as to whether a loan above 125 percent LTV can be securitized into an agency RMBS, uncertainty related to investor appetite for a pricing of HARP 2.0 bonds, concerns that reps and warranty relief still comes with certain conditions and concerns that big mortgage origination platforms could have problems executing and may not fully participate in the program.

The MBS marketplace reaction has remained very much a 'yawn' since HARP 2.0 details were announced. As it pertains to the mREITs under coverage (both in the pure agency and hybrid spaces), we believe that management teams have been proactive in repositioning portfolios so as to mitigate exposure to potential HARP 2.0 paper, said Mills.