KBW Expects ‘Modest Changes’ in Mortgage Market in New Year

""Keefe, Bruyette & Woods (KBW),"":http://www.kbw.com/ a boutique investment bank and broker-dealer, recently released its predictions for the mortgage market for the year 2013, entitled _Watching Grass Grow: Mortgage Reform in 2013._ As the title implies, KBW does not expect major changes in the New Year.

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However the investment bank does expect some ""modest changes in the mortgage landscape driven by the Federal Housing Finance Agency (FHFA).""

For example, KBW has noted whisperings throughout the media that the White House may replace FHFA Acting Director Edward DeMarco. One of the White House's complaints against DeMarco for some time has been his resistance to principal reductions.

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However, KBW said this issue overall ""is not very meaningful for Agency MBS investors since it would only be on delinquent loans that would already have been purchased out of Agency MBS pools.""

Another change KBW foresees in the FHFA is rising guarantee fees (g-fees). FHFA has already raised g-fees by 20 basis points, and KBW says it is likely FHFA will continue to raise g-fees ""to the level where it reflects the subsidy being provided.""

FHFA may also look into risk sharing, increasing private mortgage insurance coverage and raising servicing fees, according to KBW.

In other GSE-related activity, KBW expects the Home Affordable Refinance Program (HARP) to help bolster mortgage industry gain-on-sale margins. ""We believe that the HARP deadline could also be extended past the end of 2013,"" KBW stated in its report.

Lawmakers continue to deliberate many regulatory concerns, but KBW believes the Consumer Financial Protection Bureau (CFPB) will bring clarity to one major issue in the New Year â€" the qualified mortgage.

While KBW expects ""modest"" change in the FHFA, it also expects ""only minor changes"" to the Federal Housing Administration (FHA), even despite the fact that FHA's capital ratio continues to decrease.

According to FHA's annual audit report, the agency's capital requirement is now -1.44 percent, far below its requirement of 2 percent.

However, the FHA ""plays too important a role in the purchase mortgage market"" for its role to be ""meaningfully reduced.""