Though the Federal Housing Finance Agency has yet to provide full details about its new refinancing program to be launched next year, some analysts and industry observers are already convinced it will have only a limited impact.
The agency announced the new bridge program last month even as it extended the Home Affordable Refinance Program for an additional year. While it said it would release more specifics this fall, the program will be aimed at loans with high loan-to-value ratios.
Under the program, Fannie Mae borrowers must have an LTV above 97% to take advantage of the program, while Freddie Mac borrowers must be above 95%. That is significantly more strict than the current HARP threshold of 80%.
As a result, the program is expected to help far fewer borrowers, but could still play a key role if housing prices begin to fall, according to analysts.
"The immediate market impact is limited, but the program should help set up markets better in the future for any future housing downturn, benefiting the GSEs along with investors and borrowers in the long run," wrote Chris Flanagan and Ashwin Rastogi in a recent BofA-Merrill Lynch Securitization Weekly report.
One key question is how the new program will treat second liens like home equity lines of credit.
Basil Petrou, managing partner of Federal Financial Analytics, said the new program could be used to refinance government-sponsored enterprise loans that were originated simultaneously with HELOCs or second mortgages. That could benefit banks that originated those second liens.
"There are several ways the banks can get HELOC relief," Petrou said. "One would be for the LTV of the new first to be high enough to permit the borrower to pay off the outstanding HELOC. Alternatively, the reduced rate on the first creates debt to income relief that also permits rapid payoff of the HELOC. Either way, the HELOC holding bank wins."
But Laurie Goodman, director of the Urban Institute's Housing Policy Center, thinks such a move is unlikely.
"It is not a cash-out refi program," she said. "They are not going to let you consolidate second loans into underwater mortgages. With home prices expected to rise over the next few years and with the increase in LTV requirements, I don't see the new program getting a lot of traction," Goodman said.
HELOCs remain a drag in the housing sector. Many GSE loans were structured in the previous decade so homebuyers could avoid purchasing mortgage insurance and defer interest payments on HELOCs. Home equity lines of credit were popular up until the financial crisis, and many of them from that era are now resetting. Realty Trac estimated last year that 2.37 million HELOCs will reset in 2016 through 2018.
In 2016, an estimated 579,740 properties with $27 billion in seriously underwater HELOCs were slated to reset. The average interest-only monthly payment is $126. Once the HELOC resets and the borrower has to pay principal and interest, the average monthly payment will jump to $264, according to Realty Trac.
"Those people would have a lot of trouble refinancing those HELOCs because they don't have the equity," said Daren Blomquist, a senior vice president at RealtyTrac.
Another 541,650 seriously underwater HELOCs are due to reset in 2017, followed by 230,490 in 2018.
These homeowners face "significant amounts of payment shock," according to an Aug. 25 GSE Activity Report issued by Federal Financial Analytics. That "means borrowers — current now but perhaps still struggling to make ends meet after the crisis — will now face larger monthly payments than many will be able to manage," the report says.
FHFA declined to comment about a possible option of rolling second mortgages or HELOCs into a new GSE mortgage.
Overall, the new program would require borrowers to be current on their existing mortgage, have a source of income and benefit from a reduction in their mortgage payments.
"Eligible borrowers are not subject to a minimum credit score, there is no maximum debt-to-income ratio or maximum LTV, and an appraisal often will not be required," according to FHFA.
Borrowers with existing HARP loans are not eligible for the new refinancing program unless they have refinanced out of HARP using one of the GSEs traditional refinance products.
And unlike HARP, borrowers will be able to use the new refinancing option more than once to refinance their mortgage.
"Providing a sustainable refinance opportunity for high LTV borrowers who have demonstrated responsibility by remaining current on their mortgage makes financial sense both for borrowers and for the enterprises," said FHFA Director Mel Watt in a press release last month. "This new offering will give borrowers the opportunity to refinance when rates are low, making their mortgages more affordable and thus reducing credit risk exposure for Fannie Mae and Freddie Mac."
Meanwhile, the current HARP program will provide a safety net for underwater borrowers who need to refinance over the next 12 months.
FHFA estimates more than 300,000 homeowners are still eligible for a HARP refinancing. "But there is little visibility into that figure and government estimates regarding mortgage mitigation program efficacy have generally been overstated," said Isaac Boltansky, a Washington policy analyst at Compass Point Research & Trading.
