Two Harbors Still Sees 'Big Wildcard' On Mortgage Refinancing
November 03 2011 - 3:48PM
Dow Jones News
Two Harbors Investment Corp. (TWO) on Thursday said it wasn't
backing away from the cautious outlook even as others may now be
more comfortable with the risks of a revised U.S. home loan
refinancing program.
The real estate investment trust, with a $6.6 billion portfolio,
last quarter joined others in selling mortgage bonds backed by
high-interest-rate loans as it became clear the Obama
administration would make it easier for borrowers without home
equity to refinance under a 2009 program. Two Harbors said late
Wednesday that it sold $681 million in mortgage bonds seen as most
vulnerable to refinancing.
Some investors have started to veer from that strategy since the
Federal Housing Finance Agency on Oct. 24 outlined changes,
however, as most analysts doubted the new features would
significantly boost refinancings. Buying has surged in higher-rate
bonds, but potential pitfalls for those MBS persists, warned Bill
Roth, co-chief investment officer of Two Harbors in New York.
"It's a huge focus in Washington, they really want to try and
make this work," Roth said of the Home Affordable Refinance
Program. "I think there's a huge amount of pressure to do something
that works" during a presidential election season.
Potential for faster refinancing has unnerved investors in the
$5 trillion market for mortgage-backed securities of Fannie Mae and
Freddie Mac this year as more government involvement distorts
predictability. MBS are also hovering at record high prices,
setting them up for steep falls as refinancings lead to
"prepayments" of principal at face value, or 100 cents on the
dollar.
Roth's concern is reflected in the portfolio's prepayment rate
of 5% over the past two quarters, the lowest among similar REITs,
according to Keefe, Bruyette & Woods. Agency MBS prepayment
rates last quarter at mortgage REITs Invesco Mortgage Capital and
Annaly Capital Management rose, though those firms this week also
said their portfolios were protected from a refinancing
pick-up.
Under the new plan, the Federal Housing Finance Agency, which
regulates government-owned mortgage-securities issuers Fannie Mae
and Freddie Mac, will allow refinancing of loans guaranteed by
those agencies no matter the home's value. The FHFA also will
extend the term of HARP though 2013 and will waive some liabilities
to banks, giving the lenders more incentive to close loans with
risky characteristics.
Since 2009, only 894,000 borrowers have used the HARP, of which
just 70,000 were significantly underwater. The FHFA said the
changes "may roughly double or more" the number of homeowners who
enroll, while analysts at Barclays Capital estimated up to 3.1
million loans are eligible for the program.
The FHFA is due to give more details at midmonth, including how
it plans to relieve banks of liability of their "representations
and warranties" if a refinancing reveals faults in the initial
loan.
"That's the $64,000 question," Roth said on a conference call
with analysts. Representations and warranties are the "big
wildcard" for whether the plan reaches more or less borrowers than
expected, he said.
Bets that many underwater loans will not meet new HARP rules, or
that banks will be too busy refinancing more preferable loans, have
sparked renewed interest in the high-coupon MBS, however. Fannie
Mae MBS paying 6% interest have recovered their losses since the
FHFA announcement, trading up 2/32 to 109-23/32 on Thursday.
Lower-coupon MBS fell, according to Credit Suisse.
Roth said that the high-coupon 30-year MBS Two Harbors sold at
price above 110 last quarter were still lower today. In their
place, the firm bought 4%-4.5% MBS with low principal balances that
require a bigger drop in interest rates to make the cost of a
refinancing worthwhile.
Two Harbors has also increased its allocation to nonguaranteed
residential mortgage bonds to take advantage of price drops in
recent months.
-By Al Yoon, Dow Jones Newswires; 212-416-3216;
albert.yoon@dowjones.com
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