Refinancing Guidelines Are Reassuring to Investors

NEW YORK — Mortgage-backed securities issued by Fannie Mae and Freddie Mac jumped Wednesday, as investors grew more confident that new incentives to boost refinancing for borrowers stuck with high-interest-rate loans would have a limited impact.

Fannie Mae 6% mortgage-backed securities—backed by 6.5% home loans—rose 8/32 to 109 14/32, outpacing gains in Treasurys by about 7/32 after accounting for the change in interest rates, according to Credit Suisse's Locus analytics.

Prices fell late in the day, after Fitch Ratings warned about the European debt exposures of large U.S. banks, which are some of the biggest buyers of mortgage-back securities.

To speed refinancings, the two government-sponsored enterprises said Tuesday they would allow refinancing regardless of property value, lower some fees and uniformly waive most requirements that lenders be responsible for the original loan.

They left in place some potential liability to lenders and costs to borrowers, easing fears that the White House was pressing for more-sweeping aid under its Home Affordable Refinance Program.

Since 2009, 894,000 borrowers have used HARP, of which 70,000 were significantly "under water." Underwater borrowers owe more than their properties are worth. About 10.9 million, or 23%, of all residential mortgages exceeded the value of the property at the end of the second quarter of 2011, according to CoreLogic.

The new Fannie and Freddie guidelines sparked a flurry of mortgage-backed bond buying Wednesday—especially for securities backed by 6% and 6.5% mortgages—since investors can get above-market monthly payments without fear that refinancings will return their principal sooner than anticipated.

Such "prepayments" are made at par—100 cents on the dollar—causing losses on bonds trading above par. Virtually the entire market is trading at a premium, with some trading at 110 cents on the dollar or higher.

"There was a big fear that you'd see a big rise in prepayments, and, based on what [Fannie Mae and Freddie Mac] said, that has receded," said Todd Abraham, co-head of the government- and mortgage-bond group at Federated Investors in Pittsburgh. "It doesn't look like they've done anything big here."

The changes to HARP come after more than a year of speculation that the administration would enact major overhauls of mortgage programs to help lift home buying out of its five-year slump. The talk persisted even as banking groups and some investors warned that rewriting rules could discourage buyers of the securities and result in higher interest rates.

The mortgage industry has been facing stepped-up demands from Fannie Mae and Freddie Mac to buy back bad loans made during the housing bust, and Tuesday's changes to ease some potential liability were designed to relieve some of that risk. But changes didn't waive the "representation and warranty" responsibility for new loans, or fraud on original loans.

Revisions were outlined without full detail by the Federal Housing Finance Agency last month. Some investors, including mortgage real-estate-investment trust Apollo Residential Mortgage, bought high-coupon mortgage-backed securities then, but others held back until the new HARP guidelines were finalized.

High-rate loans were seen as targeted by the changes because those borrowers are most likely to have lost so much home equity in the housing downturn that they can't take advantage of today's rates around 4%. By AL YOON 

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