The Federal Housing Finance Agency shook up the mortgage world recently when it announced not only that it planned to extend the Home Affordable Refinance Program for nine additional months, but also that it planned to replace HARP with a new mortgage refinance program for struggling borrowers after HARP expires.
HARP was on track to be shuttered at the end of 2016, but the FHFA said last week that it intended to extend the crisis-era refinance program until Sept. 30, 2017 in order to “create a bridge” to a new refinance product it is planning to launch in October 2017.
While full details of the new program are not yet available, the FHFA did publish some stipulations, including that the borrower must not have missed any mortgage payments in the previous six months; must not have missed more than one payment in the previous 12 months; and must have a source of income.
“Providing a sustainable refinance opportunity for high LTV borrowers who have demonstrated responsibility by remaining current on their mortgage makes financial sense both for borrowers and for the Enterprises,” said FHFA Director Mel Watt. “This new offering will give borrowers the opportunity to refinance when rates are low, making their mortgages more affordable and thus reducing credit risk exposure for Fannie Mae and Freddie Mac.”
And speaking of credit risk, a new report from Moody’s suggests that the new refinance program is a boost to the credit risk-sharing deals being offered by Fannie Mae and Freddie Mac.
Fannie and Freddie currently offer risk-sharing deals to investors, whereby the government-sponsored enterprises offload some of the credit risk in their respective portfolios onto the private market.
In the report, Moody’s analysts Jody Shenn and Gregory Bessermann write that the GSEs’ new refinance program is a “credit positive” for the GSEs’ risk-sharing deals because homeowners that are either underwater or close to it will be able to “retire and replace” their loans, which, in turn, will lower the default risk on those loans.
“If affected mortgages linked to Fannie Mae’s Connecticut Avenue Securities and Freddie Mac’s Structured Agency Credit Risk securitization deals are retired, that will mean that the underwater borrowers can no longer default on them,” Shenn and Bessermann write.
“Also, higher prepayments from borrower refinancings would boost the credit enhancement protecting the senior and highest-ranking mezzanine tranches of the deals,” the Moody’s analysts continue. “Refinancing their loans would appeal to borrowers because it would lower their payments by lengthening the loan’s term and/or lowering its interest rate.”
As the Moody’s analysts notes, “very few” borrowers whose loans are in the pools of current CAS or STACR deals have loan-to-value ratios that would make them eligible to participate in this new refinance program, the availability of the program will provide additional protection for investors in the case of another downturn in house prices.
Whereas HARP only applies to loans originated before June of 2009, the new refinance program is available to borrowers whose loans are owned by the GSEs, regardless of the origination date, meaning that borrowers that were not eligible for HARP could be eligible for the new program.
Additionally, Fannie Mae’s portion of the program will be available to borrowers with current LTVs of 97% or higher, while Freddie Mac’s LTV limit will be 95%. HARP, on the other hand, is available with current LTVs of 80% or higher.
All of those features make this program more beneficial to borrowers and to the investors that buy up some of the credit risk tied to their mortgages, Shenn and Bessermann write.
“Although very few borrowers with loans tied to the CAS and STACR deals have current LTVs that would allow them to use the streamlined refi programs, the programs will offer protection against adverse scenarios involving home price declines,” Shenn and Bessermann write. “In such scenarios, CAS and STACR notes tied solely to borrowers with initial LTVs exceeding 80% would especially benefit, because those borrowers could use the programs after only somewhat modest declines in national or regional home prices.”
By way of example, Shenn and Bessermann noted the most recent GSE risk-sharing deal rated by Moody’s, CAS 2016-CO1, which contained high LTV loans.
According to the Moody’s analysts, about 55% of the underlying borrowers in the transactions “Group 2” pool had an initial LTV above 90%, which, according to the Moody’s analysts, means that an immediate 10% drop in property values would leave a majority of the pool with negative equity, and therefore eligible for the GSEs new refinance program.