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this figure by starting with CoreLogic’s Q2 2011estimate for the number of borrowers in negativeequity who are also paying above-market mortgagerates - 8mn (Chart 1). We then discount this numberby the share of agency mortgages in totaloutstanding mortgages (62%) and the MortgageBankers’ Association’ (MBA) estimate for theproportion of outstanding mortgages that are current- 91%; comprised of a 6% delinquency rate and a 3%foreclosure rate.Assuming an average loan size of USD 250,000 anda 1.5pp reduction in mortgage rates (from 6% to4.5%), each borrower would save around USD 230per month; thus, a 4.5mn increase in refinancingwould raise personal disposable income by USD13bn, or 0.1%.However, the actual increase is likely to be far lower.Not all eligible borrowers will apply for refinancing,while the proportion of households with negativeequity that are also current on their mortgages islikely to be below 91%. The FHFA, in what we regardto be the lower bound, estimates that between800,000 and 1mn borrowers will take advantage ofthe HARP reforms. Combining this lower figure withthe same assumptions about mortgage sizes andrates yields an estimate of USD 2.75bn in overallsavings, or just 0.02% of disposable income. Thus,while the households that are able to refinance couldsee disposable income increases of up to 5%, in theaggregate the direct impact of the programme onhousehold incomes will not be material from amacroeconomic point of view, regardless of whetherthe eventual uptake is on the low or high side.Regional impact of removing 125% LTV ceilingSo far, our analysis has made use of only nationalmortgage statistics. However, the severity of thehousing crisis varies significantly across the US.Consequently, HARP reforms could be morebeneficial in those cities and states where theproportion of deeply underwater borrowers is muchlarger than the national average. For example,borrowers with large negative equity positions aremore likely to strategically default; that is, they aremore likely to voluntarily default despite having themeans to meet their payment obligations. In Q22011, Nevada had the highest percentage of homeswith negative equity at 60% (unsurprisingly, Nevadaalso has also experienced the largest house pricefalls since 2006), followed by Arizona (49%), Florida(45%), Michigan (36%), and California (30%)according to CoreLogic. The situation is particularlygloomy for those with severe negative equity. Themost recent report also indicated that out of morethan half a million mortgage loans in Nevada almost45% are severely underwater. For Arizona, thisshare is just slightly below 30% out of 1.3mnChart 2: 15-Year Rates More AttractiveSource: Reuters Ecowin Pro, BloombergChart 3: Negative Equity of 25% or MoreSource: CoreLogicproperties; Florida has a similar percentage of its4.4mn mortgages, which are in negative equity bymore than 25%. Out of 6.8mn loans in California 17%are severely underwater, while this share forMichigan is 17% of 1.4mn mortgages loans (Chart 3).Adding estimates for just these five states yields anestimate of 3.25mn homeowners, who can potentiallybenefit from the enhanced HARP. Therefore, the newprogramme has the most potential and could help toput the floor under plunging housing prices in theseparticular regions.Overall, we consider the FHFA initiative to be apositive, albeit small, step in the direction of reducingthe structural problems in the US housing sector. Butother policy initiatives are also clearly needed. Forexample, we think that it is important to place agreater emphasis on the rapid conversion offoreclosed homes into rental properties. Such anapproach would involve encouraging privateinvestment by converting some of the real estateowned (REO) by the GSEs into rental structures. Ifwell-designed, the Obama plan could shift asignificant number vacant properties from theownership to the rental market alleviating bothdownward pressure on home prices and upwardpressure on rents.Yelena Shulyatyeva 27 October 20111Market Mover9www.GlobalMarkets.bnpparibas.com