One part of Obama’s new refi plan that remains open-ended is exactly which changes to rep and warranty exposure will be granted to originators. Since the potential for putbacks has been one of the biggest obstacles standing in the way of more Harp participation, the details, which we’ll have on November 15, matter.
To that end, here’s a useful chart from Nomura (click to enlarge):
Of these proposed changes, Nomura say the biggest will be that representations will no longer be needed for property appraisals, which can now be done via an automated model provided by the GSEs.
The Nomura analysts also discuss the inclusion of a “fraud” clause for putbacks and write …
… the current indications are that “a pattern of fraud” rather than misrepresentation of income and employment among others on some individual loans will be a key factor for claiming “fraud” which appears to be a pretty stringent condition to put-back loans for fraud.
So it looks like the FHFA have got this right, though we’ll have to wait until mid-November to know for sure.
Most of the commentary we’ve seen on the refi plan has argued that Harp II will only be marginally helpful, for both the housing market and as economic stimulus.
For our part, we were puzzled by the FHFA’s estimate of its own success. Despite all the measures that should clear the way for GSE-backed mortgages to be refinanced, the current monthly pace of refinancings is expected to remain roughly flat.
But we noticed the more optimistic view of Calculated Risk, who argues that this is likely just one part of a more comprehensive approach that should help bolster the housing market. And since he’s always worth paying attention to, especially on housing issue, here’s what he writes:
Put those three programs together: HARP refinance for GSE loans, a HARP like refinance program as part of the mortgage settlement for many non-GSE loans, and and an REO dispositions program that keeps many occupants in place as renters and I think that will help.
Harp II is the first program, so let’s look at the other two.
The second program he lists is the expected outcome of the ongoing mortgage foreclosure settlement talks between state Attorneys General and banks.
The refinancing part of the deal is expected to be only a small part of the settlement, probably about $2bn and targeting roughly 150,000 eligible homeowners, according to a report last week by our colleague Shahien Nasiripour. The rest of the $25bn deal would go towards reducing debt levels and “other schemes, such as distressed home sales in which outstanding debts are largely forgiven, payment forbearance for unemployed borrowers, the tearing down of dilapidated and vacant homes and transition assistance for homeowners to move into rented accommodations.”
All of which would indeed be helpful. But given that Harp II is expected to be strung out over two years and more help is needed sooner rather than later, then surely the salient points are that the settlement might well take quite a while and that its outcome remains entirely unclear.
The same goes for the REO (real-estate owned) dispositions mentioned by Calculated Risk. This relates to the FHFA’s August 10 request for information to find the best way to dispose some of the REO portfolios of Fannie, Freddie and the FHA. Here are the highlights:
Calculated Risk also expects there to be a kind of bulk sale of these portfolios to investors. REO is a big component of shadow housing inventory, one the single biggest problems holding back a recovery in home prices (along with, you know, the putrid economy). So anything that would reduce supply, especially through ideas like converting units to rentals and allowing homeowners to rent properties, would be welcome.
Goldman Sachs makes a related point in a note out Tuesday:
Of the many actions being considered by banks and policymakers, the most interesting to us is the FHFA’s August 10 request for information that seeks the best option for foreclosures. A more effective solution to foreclosures and delinquencies held by the GSEs and the FHA could have a much more material impact on housing fundamentals. Lower supply is positive for housing, but homes are Giffen goods (lower home prices equate to lowerhome sales), so reduced supply, which could help to stabilize home prices, has the added advantage of repairing the deflationary concerns that plague potential homebuyers. …
The HARP extension, by itself, does not change supply or demand of houses, but it signals a willingness to correct and extend programs that aid housing. The FHFA is currently working on programs to address current/future foreclosures that could more directly impact supply/demand.
Obviously we hope they’re right, but this was just a request for information and at the moment there’s really no way to know what will come out of it, or out of any of the ideas we just discussed. It’s easy to say that they’re better than nothing and that they “can’t hurt”.
But given the scale of the problem, with the large backlog of shadow inventory only gradually declining and the pace of delinquencies and foreclosures climbing again, that’s not much comfort. So we’re going to withhold any optimism until we see something more definitive and more ambitious — and, most crucially, once we start to see how successfully these approaches are actually implemented.
Perhaps we’re too cynical. We do agree that these proposals look good on paper, but that’s what a lot of people said about Hamp, and that’s what a lot of people said about Harp I.
And look what happened.