Investment Bank Expects Moderate Government Refinancing Program

While the Obama administration is still working through the specifics with the Federal Housing Finance Agency (FHFA) on how to open up refinancing to more borrowers, Keefe, Bruyette & Woods (KBW) – an investment bank specializing in financial services – notes that the most likely course of action is a moderate expansion of the Home Affordable Refinance Program (HARP) rather than a broad refinance program.



“We expect additional details to be released in the coming weeks but we think chances of a large, blanket refi program have faded and the impact of whatever program the Administration unveils will be modest,” KBW said in one of two recently released research notes.

Even a HARP expansion is likely to be modest at best, the other research note said, pointing out that HARP volume to date has totaled 838,000 loans over two years. Assuming an average loan size of $150,000, this would equate to total volume of roughly $125 billion.

“Even if this number doubles, it would still reflect a small percentage of the roughly $1 trillion in annual mortgage volume,” the research note said. “Further, given industry capacity constraints we believe that prepayments speeds are going to be constrained so an increase in HARP volume is likely to extend the current mini-refinance wave well into 2012.”

KBW said the two most likely changes include eliminating Loan Level Price Adjustments (LLPAs) and marketing directly to eligible borrowers, which is currently prohibited. LLPAs can add 40 to 50 basis points to the rate of borrowers with lower credit scores.

KBW noted: “The main impediment to refinancing older loans is rep and warranty risk for the new originator. This is unlikely to be changed because waiving rep and warranty rights would increase the credit risk for the GSE.”

The research note said any upcoming changes will have only a moderate impact on the Agency mortgage backed securities market