CoreLogic® Identifies HARP2.0's "Winners and Losers"
SANTA ANA, Calif., Oct. 31, 2011 /PRNewswire/ -- CoreLogic (NYSE: CLGX), a leading provider of information, analytics and business services, today released its response and commentary to the new HARP2.0 program from Mark Fleming, the company's chief economist:
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On October 24th the administration announced changes to the Home Affordable Refinance Program (HARP). The new program, HARP2.0, is redesigned to facilitate refinancing of insufficient and negative equity borrowers, those with loan-to-value ratios greater than 80 percent. HARP2.0 continues to be a program for borrowers with mortgages sold to the GSEs prior to the end of May 2009.
Time will reveal the true impacts of HARP2.0, but it is certain that many more borrowers will benefit than would have otherwise. The impacts will be targeted to housing markets and local economies that are the hardest hit by the housing collapse, as these are the markets with the largest shares of insufficient and negative equity borrowers. HARP2.0 will be positive for the government-sponsored entities (Fannie Mae and Freddie Mac) because it reduces delinquency risk; positive for the origination market because it will generate additional demand for mortgage refinances; may have some modest impact on consumption and the economy; neutral for the housing market itself; and negative for bondholders of high coupon GSE mortgage-backed securities (MBS). There are no silver bullets that will solve the issues facing the housing and mortgage markets, only solutions that play their small part. In the end, the best solution will be a stronger economy and the passing of time.
Key Changes to HARP2.0
Key changes to the Home Affordable Refinance Program include:
- Removal of the 125 percent LTV ceiling so that borrowers with significant levels of negative equity are now potentially eligible.
- Reduction of risk-based fees, also known as loan-level pricing adjustments, although the reduction depends on the term of the newly refinanced loan among other factors.
- Representation and Warranty relief for the lenders committing loans to the program. The details of this relief are not specifically disclosed, but it is likely that it will not cover outright fraud and egregious and willing misrepresentation. Instead, the relief will likely be around determination of value, the quality of the appraisal and reasonable and prudent underwriting.
- The allowance for the use of reliable AVMs to establish eligibility of the LTV, hence the relief described above.
- The ability to re-subordinate existing second liens that had been a significant impediment to refinancing under HARP.
- Extension of the program until the end of 2013.
Accrual of Benefits Will Vary
Because of the significant concentration of insufficient and negative equity in the markets hardest hit by house price declines, HARP2.0 will provide targeted stimulus to borrowers in those markets. That said, HARP2.0's primary benefit––increased refinancing of insufficient and negative equity borrowers––will not be a panacea for the housing market directly, because it doesn't address the two biggest downdrafts for housing: distressed borrowers and shadow inventory.
Benefits to key constituencies include:
- GSEs – Refinancing an existing GSE mortgage at a lower rate will reduce the risk of default for the GSE (and therefore the taxpayer) by reducing the mortgage payment and improving the household balance sheet. This should reduce future mortgage delinquency risk on the refinanced loans.
- Mortgage Origination Market – We agree with the general consensus that HARP 2.0 will lead to an increase of somewhere around 2 million additional transactions after accounting for additional eligibility and "in the money" criteria, starting in 2012 and going into 2013. Assuming an average loan amount of $175,000, this is $350 billion over 2 years, although we believe it will be frontloaded in 2012. With the origination market estimated to be between 1.1 - 1.2 trillion for this year and assuming similar volumes next year, the effect of HARP2.0 could be a 15 percent boost in volume next year that would otherwise have been unlikely to happen. Of course, any increase in mortgage rates in 2012 or 2013 will dampen the impact.
- The Broad Economy – If as many as 2 million borrowers refinance and reduce their mortgage payments, HARP2.0 constitutes a significant economic stimulus on the order of several billion dollars given to borrowers in many of the economically hardest hit areas. While some of this targeted stimulus may be saved or used to pay down household debt, some will be spent and act as localized economic stimulus. So this represents an effective tax cut on the order of a few billion dollars.
- GSE Bondholders – Investors will see the prepayment speeds on higher coupon MBS increase significantly as this is where the most eligible loans are likely securitized. While there is an argument that prepayment rates have been unexpectedly low because insufficient and negative equity considerations have prevented high interest rate loans from refinancing(1), HARP2.0 is likely to remove significant impediments and additionally enhance the attractiveness of refinancing. Investors will receive their capital back sooner and will have fewer options for investing it at similar rates. In the future, prepayment speeds will likely be reduced given that so many loans will be locked into historically low rates, a benefit to future bondholders.
- Housing Market – Refinancing will not significantly reduce the level of insufficient and negative equity and will be unlikely to effectively reduce strategic default. This is because the program only offers the potential of lower payments but doesn't reduce principal, so borrowers will continue to hold mortgages that are significantly higher than the values of their homes. Furthermore, as borrowers need to be current on existing loans, HARP2.0 will not reduce the level of the shadow inventory, which, by definition, is composed of seriously delinquent loans and REO held off the market. Any likely benefit will be in the form of lower future shadow inventory due to reduced future delinquency risk. There may be some moderate reduction in the risk of future foreclosures, but this is also a future benefit. Therefore, there is little direct and immediate benefit to the impacted housing markets in the near term or to the borrowers who are already delinquent. Benefits of HARP2.0 will be longer term in the form of reduced, new distressed assets.
Insufficient and Negative Equity Are Inversely Correlated with Currency
The primary issue underlying HARP is insufficient and negative equity risk preventing borrowers from access to today's low cost credit, a deterrent to consumption and improvement of household balance sheets. Nationally, based on the CoreLogic quarterly negative equity analysis, there are more than 20 million borrowers who have insufficient or negative equity positions on their homes accounting for all outstanding liens. Additionally, 4.7 million of these households are underwater by 25 percent or more. Nevada and Florida rank 1st and 3rd for the highest levels of negative equity (60 percent and 45 percent respectively) and account for 2.3 million, 21 percent, of the underwater mortgages nationally. In those same two states, the share of loans that are current in the GSE portfolio is significantly lower than in the overall GSE portfolio. Florida and Nevada loans in the GSE portfolio are current at rates of 85 and 87 percent respectively, while the GSE average is approximately 93 percent. It's not surprising that where insufficient and negative equity is concentrated is also where delinquency levels are higher. Therefore, the HARP2.0 requirement that the borrower must be current reduces eligibility in many of the areas where negative equity presents the biggest impediment to refinancing. Of course, delinquent and underwater borrowers can potentially be considered for broader loan modification programs, as opposed to refinancing options such as in HARP2.0.
Conclusions
Because of the concentration of insufficient and negative equity, the tax benefit of reduced mortgage payments will be a targeted stimulus to many of the hardest hit markets. Benefits will accrue to the GSEs in the form of reduced delinquency risk. The mortgage origination market will experience increased volumes in 2012 and 2013, and investors will experience increased prepayment speeds. The local housing markets themselves will have no immediate benefit but may over time due to the economic stimulus of the tax benefit and reduced delinquency risk in the future.
About CoreLogic
CoreLogic (NYSE: CLGX) is a leading provider of consumer, financial and property information, analytics and services to business and government. The company combines public, contributory and proprietary data to develop predictive decision analytics and provide business services that bring dynamic insight and transparency to the markets it serves. CoreLogic has built the largest U.S. real estate, mortgage application, fraud, and loan performance databases and is a recognized leading provider of mortgage and automotive credit reporting, property tax, valuation, flood determination, and geospatial analytics and services. More than one million users rely on CoreLogic to assess risk, support underwriting, investment and marketing decisions, prevent fraud, and improve business performance in their daily operations. The company, headquartered in Santa Ana, Calif., has more than 6,500 employees globally with 2010 revenues of $1.6 billion. For more information visit www.corelogic.com
CORELOGIC and the stylized CoreLogic logo, are registered trademarks owned by CoreLogic, Inc. and/or its subsidiaries. No trademark of CoreLogic shall be used without the express written consent of CoreLogic.
(1) See the CoreLogic Negative Equity Report for Q2 2011 for an analysis of the impediments to refinancing caused by negative equity. http://www.corelogic.com/HARP2NegativeEquity
SOURCE CoreLogic
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