The Federal Housing Finance Agency’s decision to reject adoption of a principal reduction program had very little impact on the pricing of $53 billion of MBS backed by Home Affordable Refinance Program loans, according to an analyst at Deutsche Bank.
“Principal reduction might have led to rising defaults and consequent prepayments in these pools and others with high-LTV loans,” according to a report by DB managing director Steven Abrahams.
But the MBS market was not surprised when FHFA acting director Edward DeMarco announced his decision earlier in the week. The GSE regulator has consistently resisted pressure from the Treasury Department to pursue principal reductions on Fannie Mae and Freddie Mac loans.
The HARP mortgages in GSE MBS have loan-to-value ratios of 105% and higher. Once a GSE loan is refinanced under the HARP program it cannot be refinanced again. This gives MBS investors protection from repayments.
The market has expressed a very strong demand for HARP MBS, the managing director for securitization research said in an interview.
On Tuesday, DeMarco also announced that Freddie Mac will streamline its refinancing process for loans with LTVs below 80%. This prompted Freddie Mac MBS to “trade off marginally against Fannie Mae’s,” Abrahams said.
