No LTV Limit on Refinance Program


On Sunday, Nick Timiraos and the Wall Street Journal posted "Home Lending Revamp Planned" (subscription required).

Federal regulators on Monday plan to unveil a major overhaul of an under-used mortgage-refinance program designed to help millions of Americans whose home values have tumbled.


The plan is the latest White House effort to deal with one of the most critical impediments to economic recovery—a stagnant housing market caused in part by a surfeit of homeowners who are unable to refinance.



The overhaul will, among other things, let borrowers refinance regardless of how far their homes have fallen in value, eliminating previous limits.

While official details have not yet been released (that is scheduled for later today), based on the preliminary information, the plan appears more aggressive than was expected.  The market has been anticipating some type of expansion of the refinance program, which to this point has had underwhelming results.  I have no idea if this version will be the one that sticks, but it certainly seems that they will continue to fiddle with this until it works.  Regardless of what we think of the usefulness of the program, community banks need to be prepared for what this will mean for their balance sheets when it finally works.

The program apparently will include any loans that were guaranteed by Fannie and Freddie as of June 2009, and will have a much more lenient and streamlined approval process than previous versions.  If borrowers are current, they are very likely to qualify.  Obviously, this means we can expect an increase in prepay speeds, and this time it could be significant.  So, what should we be thinking about?



  •  Clearly, first and foremost, we must consider our premium risk on MBS in the portfolio.  How much of our portfolio's income is at risk as we start amortizing big chunks of premium?
  • Do we have CMOs that may behave differently?  It is possible that if speeds pick up enough, some of those PAC CMOs we had targeted for specific windows could jump around on us.  Make sure you have a handle on your cash flows.  If you buy paper with tight windows, you shouldn't see anything significant, but make sure run the analysis if you might have exposure.
  • And most important, what will we do with all of the cash that will be coming back at us?  Most of us do not have loan demand to sop up the liquidity already on the balance sheet, much less a new slug of cash.  Our higher coupon MBS have been providing solid income, and replacing it will be difficult at best.
  • Some of our clients are increasingly being squeezed by aggressive loan pricing, specifically some of the larger regional banks willing to do 7 and 10 year fixed rates on stronger commercial loans.  Those deals will be even more painful to lose if your prepays are faster, so what is your strategy?  Most banks are not willing to add interest rate risk, especially if they are already feeling the effects of it in the bond portfolio.

There are strategies that may be a fit for your balance sheet.  Contact us if you would like to discuss your situation