Fannie Mae and Freddie Mac mortgage bonds slumped as the Federal Housing Finance Agency announced changes to guidelines for the government-supported companies’ refinancing program affecting so-called underwater borrowers.
Fannie Mae’s 6 percent, 30-year fixed-rate mortgage securities underperformed U.S. Treasuries by 0.36 cent on the dollar as of 9:15 a.m. in New York, the most since Sept. 8, according to data compiled by Bloomberg. The bonds, whose underlying loan rates average about 6.5 percent, trimmed earlier relative losses of almost 0.7 cent.
Adjustments to the Home Affordable Refinance Program include its expansion to include borrowers with any amount of negative home equity and an end to “certain” contractual promises about underwriting quality made by lenders, called representations and warranties. The FHFA, which is overseeing the conservatorships of Fannie Mae and Freddie Mac, disclosed the changes in a statement posted today on its website.
The alterations to originator representations and warranties, which can expose lenders to demands for repurchases of delinquent debt, “could create a meaningful incentive to banks” to refinance existing borrowers with higher-coupon loans and affect the pace of prepayments “fairly significantly,” Nomura Securities International Inc. analysts led by Ohmsatya Ravi wrote in a note to clients.
Refinancing of loans in mortgage bonds trading for more than face value can damage investors by repaying them faster at par and reducing future interest payments.
The HARP program, introduced in 2009, has handled almost 894,000 loans, according to the FHFA statement. The agency said Fannie Mae and Freddie Mac will send more information to lenders by Nov. 15, and that some originators may be ready to take applications by the start of December.
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