HARP 2.0 Pricing, Processing and Underwriting in Focus

For those playing along at home, the U.S. Treasury Department continues to wind down 2008's TARP, the Troubled Asset Relief Program.  More than 80% ($333 billion) of the $414 billion funds disbursed for TARP have already been recovered to date through repayments and other income - the latest coming from AIG. The government was paid an additional $1.5 billion from AIG, which pays off in full the Treasury's preferred equity investment in AIG more than one year ahead of schedule. That is certainly good news.

And there is more good news on the hiring front. A California-based mortgage banking operation is looking for personnel to staff its new Consumer Direct Division in Orange County. They are a multi-state Fannie Mae direct lender which funded over $4.4 billion in 2011, of which over $2.5 billion were serviced retained. Originators can expect "exclusive leads to be provided with high closing ratio, comprehensive training program, W-2 platform with benefits, and salary & commissions during development period." The ideal candidates should have strong verbal and written communication skills, and must be California DRE and NMLS licensed. Interested parties should submit their resumes, to be kept confidential, to Mike Smith at mikesmith.1000@yahoo.com.

Originators are focused on HARP 2.0, in spite of some potentially bad pull-through numbers that are circulating. But where will investors price pools with this product? Why would anyone pay the same price for a 150% LTV 4.25% loan as they would for a 60% LTV 4.25% loan? Remember that both Fannie and Freddie have been buying mortgages with LTV's greater than 125% through their cash windows since February, but MBS pools backed by these will be issued starting in June. A starting point that some investors are using in pricing this new product is looking at HARP 1.0 pool pricing, backed by mortgages with 105%<LTV<125%. The 4.0% coupon Fannie pools containing HARP 1.0 loans are priced about 1.5 points worse than "regular" pools, but 4.5% pools (containing 4.75-5.125% mortgages) are trading with a 3.0 point "payup." This price difference can equate to .75% or more in rate difference.

At this point, investors (e.g., pension funds, insurance companies, and so on) in mortgage-backed securities note that the prepayment speeds between the two types of loans (standard products and HARP 2.0 loans) could be different, the ability for investment banks to put HARP 2.0 loans into CMO deals or REMIC's is in doubt, and mortgage REITs may have a very limited (if any) bid for these pools. So until the market for these loans "settles down" and becomes more liquid, given the reps & warrants for this product, and it becomes more liquid, originators will continue to see rate and pricing difference well into the future - and they'd better set borrowers' expectations.

LO's who know their products are reminding their borrowers that HARP 2.0 is only available to borrowers whose loan is owned by either Fannie or Freddie. Normally the underwriting differences between these two are not that significant, with the biggest difference is that Freddie will do a pure blended ratio with a non-occupant co-borrower and Fannie will not. But LO's jungle drums are saying that the differences in HARP 2 loan underwriting are dramatic, and that Fannie is much more liberal than Freddie. I am not an underwriter, but anecdotally, the DTI for Freddie is 45%, for FNMA it is 65%, Freddie is concerned about cash reserves, and aside from the current mortgage not having any lates within the last 6 months and only one 30 day late within the last 12 months, according to Freddie Mac any revolving or installment late within the last 12 months could kill the deal. Lastly, it is rumored that revolving debt that is over 50% of the credit limit, in spite of good credit scores, will cause Freddie Mac to deny/decline the application. And considering most equity lines are coded as revolving accounts and are typically over 50% of their credit limit, most Freddie Mac loans will not be refinanced.

Chris M. writes, "I spent 8 years in a large correspondent's lending division and have evidence that when a borrower is underwater, it is not if but when the loan ends up in default or a short pay.   HARP 2.0 will only delay the inevitable which may be what is needed to stabilize values enough and give us time to absorb the crud."

On the flip side for the positive, EverBank has spread the word to its clients that it is doing unlimited LTV's on HARP 2.0. One AE put forth these simple steps in doing a HARP loan. "1. Check if Fannie or Freddie loan. This website is a very good and direct from the government on what all programs are available, HARP being one of them. 2. Once you find out Fannie or Freddie, run it through the appropriate AUS system and make sure to select the HARP program through the system you run. For those who still don't know, Fannie Mae is DO/DU and Freddie is LP. 3. Receive approved findings WITH an appraisal waiver for 'unlimited LTV.' Fannie Mae will be Property Field Waiver, Freddie Mac will be HVE with High or Moderate confidence level. 4. Review if loan has MI or is requested MI be put on the loan. If loan has MI it should show the company and cert # within the findings. Once you have that, please reach out to that MI company to make sure it is willing to transfer that MI cert over to EverBank before sending in the loan. Some MI companies might have restrictions. We will transfer the cert in our underwriting process if MI company allows. 5. Once you have done all of this, you are ready to submit your loan according to what AUS findings are asking for conditions to EverBank. Remember, the only time you will NOT have unlimited LTV is if you have a LPMI or NO appraisal waiver. Also remember, if a condo to disclose our condo review fee of $200 for existing projects and $500 for new completed projects. Always disclose the full appraisal fee upfront just in case, the PIW fee will be $75. Please make sure to prepare your borrowers for extended turn times, therefor it is suggested to price and lock for 45 to 60 days during this refi boom of HARP products." If you have any questions, write to Jason at Jason.wroble@everbank.com.

Home builders aren't too focused on HARP 2.0 loans, but KB Home said Friday that cancellations on contracts for new homes spiked in its fiscal first quarter, driving home orders down 8% as it heads into the spring home-selling season. KB, which recently announced that Fortress' Nationstar unit would be its preferred lender, reported a sharply smaller loss for the December-to-February quarter. KB's results fell short of Wall Street predictions, and shares tumbled more than 9% at one point in Friday trading. The Commerce Department reported on Friday that sales of new homes in the U.S. fell in February for the second straight month. They dipped 1.6 percent to a seasonally adjusted annual rate of 313,000 homes -- less than half the 700,000 that economists consider to be healthy. And analysts remind us of the question, "Why buy a new one when there are so many old ones around?" But KB ended the quarter with a 30 percent higher backlog of homes under contract. Backlog is a strong indicator of potential future sales -- if orders aren't canceled.

Originators and investors alike are seeing a drop in traditional 30-yr mortgages and both a huge increase in 15-yr paper and also a slight increase in ARM production. And stats bear this out: the share of 30-year MBS in total Fannie & Freddie fixed-rate MBS issuance has declined gradually from 80%-87% in early 2009 to only 59%-64% in the second half of 2011. In fact, the recent percentage of 30-year MBS issuance in total F&F fixed-rate MBS is similar to the levels last seen in 2003. Yes, the production of shorter maturity products (10, 15, or 20-yr) picks up in a refi environment, but it has been somewhat of a surprise their percentage issuance has approached the levels last seen in 2003 (even after considering the fact that GNMA issuance picked up a lot and most of the GNMA issuance is in 30-year MBS).

So what is going on out there versus 2003? First, borrowers refinancing mortgages these days have been in their current mortgage for 4-5 years versus only 1-2 years in 2003. The more seasoned borrowers have a higher propensity for refinancing into a shorter maturity mortgage, all else equal. Fannie & Freddie are providing added incentives to refinance into a shorter maturity mortgage by eliminating LLPAs when a borrower refinances into a shorter maturity mortgage. And lastly, the difference between shorter maturity and longer maturity mortgage rates is higher now than in 2003 although the Treasury and swap curves are somewhat flatter.

The financial and political arenas are still reeling from the news that Rod Blagojevich will not be allowed to use hair dye in his Colorado prison. Nonetheless, we will move forward or at least in some direction. The 10-yr T-note closed Friday at 2.24%, but mortgages did not do well prompting one trader to note, "The MBS market is about as constructive as my mother-in-law at the dinner table."

We'll see how the laws of supply (originator selling & hedging) and demand (by the Fed and others) stack up this week, but we have a pretty busy week for U.S. economic news. Today is Pending Home Sales, tomorrow is the Case-Shiller housing price index and Consumer Confidence, and Wednesday is the always-volatile Durable Goods number. Thursday is Jobless Claims and a GDP number for the 4^th quarter (old news by now). And on Friday are Personal Income & Spending, PCE prices, and numbers from the Chicago purchasing managers and the University of Michigan. In the early going the 10-yr is up to 2.27% and MBS prices are worse between .125-.250.

A doctor says to his patient, "I have bad news and worse news."
"Oh dear, what's the bad news?" asks the patient.
The doctor replies, "You only have 24 hours to live."
"That's terrible," said the patient.  "How can the news possibly be worse?"
The doctor replies, "I've been trying to contact you since yesterday."