November 17, 2011

Close Look At HARP 2 Underwater Refi Rules

November 17, 2011

Close Look At HARP 2 Underwater Refi Rules

Julian already covered what consumers must know about the new HARP underwater refi program, and how to prequalify while awaiting lenders to roll out the program in the coming weeks. So below I’m dissecting the Fannie/Freddie guidelines for HARP 2 for lenders and mortgage bond investors.

The recent HARP 2.0 announcement was largely in line with expectations, though perhaps the biggest surprise was Freddie’s maintaining of reps and warrants on the original loan file for <80% LTV loans. But many are still dubious about broader economic growth impacts.

Common to both Fannie and Freddie are several elements.

It eliminates the 125% LTV cap for HARP – this increases the universe by 3%, and 10-15% for high coupon 2006-08 vintages. It extends HARP through December 31, 2013 – this should make servicers more willing to invest in HARP because it is no longer simply a one-year program.

Both programs will become effective on December 1 (although LP won’t be ready until early next year, and many companies are running into problems not being able to manually underwrite conventional conforming loans – see notes below).

It allows up to one delinquency in the prior 12 months, as long as it was not within the last six months – this increases the number of borrowers eligible for Freddie HARP by 3-5%, no change for Fannie.

HARP 2.0 caps LLPAs on >80 LTV 30-year fixed rates at 75bp (previously, high LTV mortgages were capped at 2 points) – this reduces costs for high LTV borrowers, though they were already deep-in-the-money.

For low LTV 30-year mortgages, the cap will continue to be at 2 points – this is unchanged. And it eased rep and warrant language, although this is still Fannie and Freddie specific.

There is apparently Fannie Mae specific language.

For example, for DU Refi Plus (Fannie’s desktop underwriting system, used mainly for cross-servicer refis) the lender is not held responsible for any of the reps on the original loan.

HARP 2.0 clarified exactly which reps remain on the old loan file under Refi Plus (the more streamlined approach, used mainly for same-servicer refis), the lender must rep to basic standard reps on the original loan such as:

(1) it doesn’t violate Fannie’s charter (e.g. it’s not a condo hotel which would be a commercial property);

(2) it doesn’t violate the law; and

(3) there is no collusion among borrowers to commit fraud. Solicitation may be done on >80% LTV loans as long as it is done across both Fannie and Freddie, and cannot target only loans that the lender doesn’t own.

Pooling for the highest LTV loans (>125%) will be in a new CV prefix beginning June 2012. These will be non-TBA eligible. And it is expected that the AVM coverage for Fannie Mae will go from about 30% currently to as high as 80% to match Freddie, though this is not specifically outlined in Fannie’s announcement.

There is also still Freddie Mac specific policy.

For loans >80% LTV, Freddie will no longer hold the lender responsible for the original loan file. For loans <80% LTV, the lender will actually still hold the original reps and warrants. (This won't help refinancing low LTV Freddie pools.) Lastly, if the borrower is under 80% LTV on the first lien, there is a cap on the total first plus second lien of 105% LTV.

As always, it is best to consult the actual announcements from Fannie & Freddie, as it is with other investors!

What impact is this expected to have on existing MBS pools?

Servicers may have an incentive for Fannie MBS and for high LTV (>80%) Freddie loans to refi into the easier reps relative to the old loan.

Second, a greater AVM coverage by Fannie will allow servicers to target more than twice as many borrowers as before.

Third, HARP 2.0, in combination with more AVMs, will give servicers the confidence to refi high LTV borrowers, since there is no fear of accidentally exceeding a 125% LTV cap.

And to encourage high LTV refinancing, the GSE’s are lifting existing restrictions on borrower solicitation for >80% LTV loans which should increase volumes.

As for other miscellaneous observations I’ve read…

For loans being processed through Refi plus (manual underwriting), the lender will represent and warrant that the original loan being refinanced by a Refi Plus mortgage loan was not originated or sold pursuant to any scheme or pattern of fraud that involved two or more mortgages and two or more perpetrators acting in common effort with respect to such mortgages.

Also, the lender must represent that the loan being refinanced was eligible for sale in accordance with Fannie Mae’s charter.

Apart from loan size restrictions that may vary based on the units in a home, this restriction can potentially apply to loans that were falsely reported to have an LTV less than 80%. Per the charter, these loans would have required mortgage insurance.

The Fannie Mae release made no mention of automated appraisals. However, it did state that the lender is responsible for reps and warrants on the new loan if an appraisal is obtained. Aside from the reps and warrants relief due to the likely increase in the usage of automated appraisals, the release did not provide any reps and warrants relief on appraisals.

According to one analyst, about 80% of Freddie HARP refinancings are already using automated appraisal whereas the number is only 30% of Fannie HARP refinancings. The general market perception was that as HARP 2.0 is rolled out, Fannie Mae will allow lenders to use automated appraisals on a much larger percentage of HARP loans. Since the automated appraisal is provided by the GSEs, this would reduce the appraisal related reps and warrants risk on the new loan.

But Fannie Mae will only allow automated appraisal for DU Refi Plus. For Refi plus (manual) – which is much more common for same servicer refinancings since the loan does not need to be re-underwritten – the lender can either use the original appraisal (if they can represent and warrant that the property value is not less than the original appraised value) or use a new appraisal or exterior-only inspection.

In other words, automated appraisals cannot be used for Refi plus (manual). This would mean that originators would need to use DU Refi plus but in this case they would need to re-underwrite the loan by gathering the income/liabilities/asset information.