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Analysts Give HARP Reform Bill Slim Chance of Becoming Law

MAY 14, 2012 11:43am ET
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Congress is not likely to pass recently proposed legislation that would reform the Home Affordable Refinance Program and promote competition among mortgage servicers, according to analysts at the Royal Bank of Scotland.

Sens. Robert Menendez, D-N.J., and Barbara Boxer, D-Calif., introduced a bill called the Responsible Homeowner Refinancing Act of 2012, which aims to remove barriers to HARP refinancings.

Most notably, the bill seeks to encourage competition by allowing a different servicer to refinance a mortgage on the same terms that apply to the current servicer. It also proposed the expansion of HARP 2.0 to cover loans originated between June 2009 and May 2010.

RBS wrote that there are many reasons that Congress will probably not pass the Menendez-Boxer legislation.

Many market players, they said, see this legislation as a political showcase. First, analysts said that given that no legislation is required when changing the HARP parameters, the Federal Housing Finance Agency could actually make the HARP changes on its own.

This is why the legislation simply proposes a platform to force FHFA into coming up with its own action plan to make HARP more effective.

RBS added that congressional gridlock during an election year will also hinder the bill’s passing. The analysts said Republicans have always said that the housing market has to heal on its own and allow capitalism to work.

"Amid the signs that the U.S. housing market appears to be stabilizing, any form of government intervention certainly won't top the GOP's solutions list for the housing problems," they wrote.

Although they believe it is highly unlikely that Congress will pass this bill, buyers should know its potential effect on prepayments and HARP pool valuations.

It is clear that extending the HARP cut-off date allowing for "re-HARPing" can have a considerable impact on prepayments for certain coupons.

The "re-HARPing" effect might cause the worse convexity and lower dollar prices for some MHA and CQ/U6 pools.

Meanwhile, RBS analysts said this can discourage many lenders from actively playing a part in the HARP program, as HARP business can become less lucrative if rising prepayments result in lower prices for pools backed by HARP product, they explained.

In related comments, BNP Paribas analysts said in a recent report that comments from an executive at an active HARP lender as well as the drop off in CR/U9 origination seem to imply that HARP 2.0 might not be sustained very long, and May might represent the peak in HARP prepayments.

The two factors mentioned above might mean the market has already experienced a dip in applications. Considering the 40- to 55-day processing time closings, prepayments should drop by late June, analysts said.

Additionally, May has 22 business days compared to 21 in June, which might boost May CPRs as well. This is why, they said. May prepayments can show the peak in HARP speeds. Longer-term, BNP analysts said that higher g-fees should cause dampened prepayments.

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