Obama's Residential Proposal has Mixed Potential

Location: New York
Author: Sandro Scenga
Date: Monday, February 13, 2012

Fitch Ratings says that some of the proposed changes by President Obama could be positive for the U.S. residential market. We also believe some will be neutral and some potentially negative. Most could face fierce political opposition. Obama first spoke of these during the State of the Union address on January 24 and some of the details were released on February 1 by the White House Office of the Press Secretary.
Two of the proposals could have a material impact on the market but their passage is uncertain. One of these is a refinancing option for current borrowers. We would expect it to have a mixed impact on RMBS, should it be made available to the private label sector, as it could remove performing loans as well as those with high LTVs from existing deals. The remaining loans could be of yet higher risk. The second of these proposals is that all lien holders, public and private, provide one year forbearance to unemployed borrowers. This proposal follows the recent announcements for the GSE programs and suggests bank and private held loans should follow suit. There is no legal framework for this and we expect it could be fought by several of those lien holders.

Also of concern to Fitch are the proposed changes to HAMP that include a new qualification ratio and principal forgiveness. We believe that using a total debt (instead of only housing) ratio to set the qualification limit presents risk to the first lien investors. It is impossible to gauge the impact of more flexible debt-to income criteria as there was no limit on total debt in the earlier program. The effect of proposed increases in principle forgiveness incentives is also difficult to evaluate as so few of the HAMP loan modifications for private transactions have provided for principal forgiveness.
One proposal that could positively affect the inventory of foreclosed homes would be to create an FHFA REO-to-rental initiative. While we believe that this proposal could improve the inventory and release some pressure on the rental market, it might have unintended consequences for the REO sellers. Investors are likely to pay less for the properties than other buyers. Also, investors typically require their properties be in specific geographic areas so that their management costs are consolidated. We believe that the success of this initiative could depend on addressing those needs.

Additional information is available on www.fitchratings.com

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