Credit Risk Transfer - Commentary

Performance Insights into Refi Plus and HARP

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Fannie Mae's Connecticut Avenue Securities® (CAS) and Credit Insurance Risk Transfer (CIRT) programs have transferred credit risk on newly acquired loans to private investors since 2013. As part of our ongoing capital management efforts, we expect to transfer credit risk on other parts of our portfolio. In November 2019, Fannie Mae will issue the first CAS transaction referencing loans that were acquired as part of the Refi Plus program. The Refi Plus program includes but is not limited to the Home Affordable Refinance Program, or HARP. This commentary provides an overview of the Refi Plus program, analyzes the profile of loans acquired through the program, and reviews their performance in order to provide insights that may help investors evaluate these transactions.

Key takeaways:

  • Loans that took advantage of the Refi Plus program have recovered a significant amount of equity since the financial crisis, resulting in strong credit performance and improved refinancing potential.
  • The prepayment behavior of 2009-2012 Refi Plus loans has been similar to 2009-2012 non-Refi Plus loans and significantly more stable than more recent originations, adjusted for rate incentive.
  • We can use the Fannie Mae Single-Family Loan Performance primary and HARP datasets to model the default performance of Refi Plus loans. After adjusting for their risk attributes, 2009-2012 Refi Plus loans exhibit approximately 20 percent unexplained underperformance in default rates.
  • Loss severities for 2009-2012 Refi Plus loans are similar to those of 2009-2012 non-Refi Plus loans after considering the presence (or lack) of mortgage insurance (MI).
  • An alternative approach may be to frame loss expectations in the context of historical vintages, given that cumulative delinquencies for the Refi Plus cohort have converged to the 2002-2003 vintages.
  • Default expectations should be adjusted for seasoning and performance, as we would expect performing loans with significant seasoning to have a very low propensity to default going forward. Applying this methodology to CAS 2019-HRP1 generates expected losses in the range of 5-9 basis points and stress losses in the range of 10-19 basis points.

Access the full commentary: Performance Insights into Refi Plus and HARP  

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