Fannie Mae and Freddie Mac will adjust their risk-sharing deals so that they can accommodate high loan-to-value loans refinanced under the programs replacing HARP.
THE HIGH LOAN-TO-VALUE REFInance programs replacing the Home Affordable Refinance Program will require a change to the structure of Fannie Mae and Freddie Mac’s credit-risk transfer deals.
The new high LTV refinance programs will be available on loans originated on or after Oct. 1. If the original loan was included in the reference pool of a risk-sharing deal, the newly refinanced loan will take its place.
Currently, a loan must have been originated on or before May 31, 2009 to be eligible for HARP and new loans originated in the program aren’t included in the government-sponsored enterprises’ risk-sharing deals.
“This will help preserve credit loss protection on the loans without unwinding the protection paid for through CRT transactions,” the FHFA said in a statement when it announced the change and extended HARP through Dec. 31, 2018.
The new Fannie Mae and Freddie Mac refinance programs should provide incremental support if home prices decline, according to Fitch Ratings. But while the programs are moderately credit positive compared to a scenario without the availability of a high LTV refinance program, preserving the refinanced loans in the reference pools will broaden the default window for investors, the ratings agency said in a recent report.
“The new refinance programs should help improve the payment status for performing borrowers with little or no equity in future home price decline scenarios,” wrote Grant Bailey, Fitch managing director.
Some market participants may need to restructure their loan-loss models depending on how they previously managed loans in the historical dataset refinanced through HARP.
“The original GSE dataset reported high LTV refinances through HARP as terminal events that paid the loans off in full,” Bailey wrote. “Once the new refi programs go into effect, investors will remain exposed to default risk following a high LTV refinance.”
The addition of HARP data into the existing historical dataset raises the historical default rates by 5%7% for the vintages most dependent on the program.
This could potentially signify a modest increase in losses in future stressed environments.
Because the Federal Housing Finance Agency extended HARP another year, Fannie and Freddie’s new refinance programs will take effect on Dec. 31, 2018, once HARP expires.
More than 3.4 million borrowers have refinanced their loans under HARP, the FHFA estimates. But new HARP loan volume has dwindled as home prices have increased. Still, another 143,000 GSE borrowers could still benefit from a refinancing through the program, the FHFA estimates.