Lenders would compete to refinance underwater mortgages if Fannie Mae and Freddie Mac stopped demanding "put backs" when new loans default, according to mortgage strategists at Bank of America/ Merrill Lynch.
In addition, lenders would have a greater incentive to refinance borrowers through the Home Affordable Refinance Program if the GSEs also buy the servicing rights of newly refinanced loans at market prices.
"The costs related to putbacks and the servicing liability of high LTV loans strongly disincentivize lenders from refinancing loans that are serviced by other parties," Merrill/B of A strategists say in a new report on agency MBS.
Obama administration officials are looking at expanding the HARP program to allow more borrowers with high LTV loans backed by the GSEs to refi at today's low market rates.
B of A/Merrill Lynch analysts believe the Obama Administration's refinancing program should target loans originated from 2006 to 2008 where borrowers are current on the payments. Those vintages are considered “legacy assets” that are responsible for most of Fannie and Freddie's continuing losses.
In addition, the GSEs should relax their refinancing restrictions, allowing lenders to target underwater borrowers and solicit them to refinance, Merrill believes. The firm says the GSEs should place the newly refinanced loans with special servicers that are better equipped at dealing with high risk loans.
Overall, these steps will reduce the GSEs' losses on their legacy assets, Merrill mortgage strategist Vipul Jain told National Mortgage News. "They will make money because their future losses will be much lower,” he said.
