Fitch: New GSE Refi Programs ‘Modest Plus’ for U.S. Credit Risk Transfers

New refinance programs announced by Fannie Mae and Freddie Mac should provide incremental support in the event of future home price declines, said Fitch Ratings, New York.

Fitch noted both Fannie Mae and Freddie Mac announced new high-loan to value refinance programs that will be available for eligible loans made after Oct. 1. Both GSEs said loans refinanced through the new programs will remain in the reference pools of future credit risk transfer transactions. Although the programs are a modest credit positive relative to a scenario without any high-LTV program availability, retention of the refinanced loans in the reference pools extends the default window for investors.

“This may require some market participants to revise their loan loss models depending on their prior treatment of loans in the historical dataset that were refinanced through the Home Affordable Refinance Program,” said Fitch Managing Director Grant Bailey. “The original GSE dataset reported high-LTV refinances through HARP as terminal events that paid the loans off in full. Once the new refi programs go into effect, investors will remain exposed to default risk following a high-LTV refinance.”

Fitch said adding HARP data to the prior historical dataset increases the historical default rates by 5-7% for the vintages most reliant on HARP. This essentially translates to potentially a modest increase in losses in future stressed environments. For reference pools with a projected loss of approximately 3% in the “BBBsf” rating stress, the difference equates to roughly 15 basis points.

Despite this, Bailey said Fitch is not likely to revise its loss projections for future CRT transactions exposed to the subsequent default risk of high-LTV refinances. “[We] already took this type of risk into account when developing its loan loss model by assuming some HARP refinances would subsequently default,” Bailey said. “Making this adjustment in advance resulted in higher projected defaults that already bake in the potential for an extended default window for high-LTV borrowers. The newly provided HARP data indicates default trends similar to Fitch’s initial assumptions.”