Housing Smoke and Mirrors (15) – “Re-tuning the HARP”

Written by , KeySignals.com

In Housing Smoke and Mirrors “Exit Rush[i], the impact of rising yields was observed to be undermining the mortgage refinancing market dynamics. This was also seen to have the secondary effect of retarding the mortgage securitization process; as buyers went on strike. The most noticeable buyer’s strike has been by the Fed itself. The April Lender Processing Service’s Mortgage Monitor was used as an example of the internal stress building up in the mortgage market[ii]. We said that:

“What is termed “Burnout” was also observed in the post-2009 Vintages. Modification eligibility through HARP is limited to pre-2009 Vintages, which are seeing healthy use of this programme and refinancing. Post-2009 vintages have exhausted most of their refinancing possibilities. Pre-2009 Vintages are now most as risk from the backup in interest rates. Even once they have been modified through HARP, the rate of interest may now be too high for the borrower to sustain. Risk is therefore growing in the pre-2009 Vintages; and there is also limited room for improvement in the post-2009 Vintages. The improvement in prepayments for borrowers with low credit scores may therefore be stalling out.”

Fast forwarding from April to July, the violent correction in yields has prompted the New York Fed to suggest remedial action to prevent a meltdown. In a research paper entitled Improving Access to Refinancing Opportunities for Underwater Mortgages[iii], the New York Fed suggests two actions that should be taken to address the growing threat from negative equity as yields rise. The first suggestion is to remove the limitation to only pre-2009 Vintages set by HARP. The second suggestion is to allow multiple modification of the same loan. Clearly the New York Fed is feeling the flames of potential “Burnout”. It is floating the concept of further HARP modifications in the public domain, with the view to getting them debated and forced through Congress.

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The rise in interest rates, since Bernanke said that he was worried about speculators “reaching for yield” has rattled the markets and also the Fed[iv]. Ostensibly, half of the fall in yields that the Fed engineered with QE was unwound in the space of three months. The Fed wanted to unwind a developing risk asset bubble; and instead triggered a full blown bear market. The subtlety of the Fed’s communication strategy has been totally lost on the markets. Having seen the carnage, various Fed speakers opined that the correction was overdone; and Bernanke had to spell this out for the record in what appeared to be his final Humphrey Hawkins testimony[v].

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Just to emphasize the point, the Fed also signaled that it was time to get back into MBAS as it started buying in time to reinforce the Humphrey Hawkins message.

The sound of the Bernanke singing and HARP being re-tuned has got the ‘Risk On rally’ going once again. The GSE’s are also singing from the same sheet.

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Fannie Mae was quick to come out with a commentary and charts, which showed that although rising interest rates hit sales they did not arrest the trend in rising prices[vi].

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Freddie Mac was little more out of tune; and conceded that the rise in interest rates will slow the pace of housing activity[vii].

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Freddie also noted that the ‘Multi-Family’ sector had fully recovered. This was confirmed by the June Housing Starts data; which showed the ‘Multi-Family’ component in decline. Dissonant noises were audible from Freddie.

There are more sounds of dissonance from those who have substantial profits and risks that they wish to realize and shift respectively before the Fat Lady sings. In Housing Smoke and Mirrors “Style Drift” it was observed that the “Smart Money” was reducing risk. Blackstone was identified as a key signal of this style drift.

“Blackstone Group, the doyen of Private Capital and its footprint in housing, gave off a strong signal of the ambiguity developing since the “Taper Talk” gained currency as interest rates rose[viii]. Blackstone is taking a less risky position, by changing its strategy from owning rental properties to lending to investors who wish to own.”

Blackstone more recently has been seen taking some more chips off the table, thanks to the Fed’s provision of a liquidity event. It has just put up its Brixmor Property Group, which is the second largest mall owner in the US, for IPO. Not only does Blackstone see risk in commercial real estate, it is also seeing risk in the consumer sector from rising interest rates.

In Housing Smoke and Mirrors “Exit Rush” the key signal of weakness in the residential sector from the upcoming IPO filing of American Homes 4 Rent was also observed[ix]. This IPO was recently filed[x].

The dissonance does not necessarily signal another imminent housing crisis. It does however sound like the easy money has been made. The Fed is grinding the organ and the real estate bulls are dancing. There are however some dancers who are sitting out the next few dances; and positioning themselves to sweep the floor when the other dancers fall and the Fed is forced to turn the handle faster for longer.



  1. Housing Smoke and Mirrors (10) – “Exit Rush”
  2. LPS Mortgage Monitor: May 2013 Mortgage Performance Observations (data as of April, 2013 month-end)
  3. Improving Access to Refinancing Opportunities for Underwater Mortgages
  4. Speech (Chairman Ben Bernanke at the 49th Annual Conference on Bank Structure and Competition sponsored by the Federal Reserve Bank of Chicago, Chicago, Illinois)
  5. Testimony: Semiannual Monetary Policy Report to the Congress
  6. Rate Increases More Likely to Impact Sales than Home Prices
  7. “Taper Talk” Hurts, But Not Enough to Stall Recovery – Freddie Mac
  8. Blackstone Raises $5 Billion Rental Bet With Lending Arm
  9. American Homes 4 Rent Seeks Up to $1.25 Billion in IPO
  10. Hughes’s American Homes 4 Rent Seeks $794 Million in IPO


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