By the Numbers
New agency refi programs look limited
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MBS prepayment speeds seem unlikely to substantially increase due to Fannie Mae and Freddie Mac’s recently announced low-income refinancing initiatives, based on new information released by the agencies on Wednesday. Limits on income and payment history along with existing agency refi programs that already target low-income borrowers mean the new efforts will likely help only a narrow margin of borrowers. Fannie Mae’s estimates of MBS exposure to the new program likely overstate the absolute amount of principal at risk.
The new programs target borrowers making at most 80% of their area median income. These programs offer limited benefit to borrowers with debt-to-income ratios up to 50% that were already eligible for existing refinance programs. Only 2.7% of loans originated since 2014 had DTIs at or above 50%, and many of them are HARP loans that are ineligible for the new refi programs. Borrowers that have lost income due to the pandemic may have drifted above 50% DTI, but many of them may not qualify due to strict payment history requirements. None of the new information alters the view, discussed here, that the effect on prepayment speeds should be modest. Fannie Mae’s program is available starting June 5, while Freddie Mac’s is available starting August 30.
When asked, both GSEs confirmed that delinquencies during Covid-19 forbearance would render a loan ineligible for these programs. This should reduce the effectiveness of these programs. Many borrowers who might need the new programs to refinance would have suffered income loss, and as a result likely used forbearance to skip payments on their loans. But these refinance programs, known as RefiNow at Fannie Mae and Refi Possible at Freddie Mac, require borrowers to have no delinquencies in the last six months and at most one 30-day delinquency in the last 12 months. Any of these borrowers will be disqualified. The GSE statements, however, contradict documents published by the GSEs. The documents state Covid-19 origination flexibilities, which include provisions to ignore delinquencies during Covid-19 forbearance, continue to apply.
The documents outlined other categories of loans that are ineligible:
- HARP loans
- High LTV refinance loans
- RefiNow and Refi Possible loans—borrowers cannot re-use the programs
- Conforming jumbo loans
- Loans less than 12-months seasoned
- Loans more than 120-months seasoned
- RefiNow and Refi Possible cannot be combined with existing programs to refinance low income borrowers
Fannie Mae published data showing an estimate of eligible loans by coupon, vintage, and specified pool attribute. However, they do not know the borrower’s current income. So they compare the borrowers income when the current loans was originated to the 2020 AMI, which overestimates the number of loans below the 80% threshold. On the other hand, they cannot estimate income loss, which underestimates the number of borrowers below 80% AMI and prevents estimating the number of borrowers over 50% DTI.
Understanding the number of borrowers below 80% AMI and also above 50% DTI is critical to estimating the effect of the program on prepayment speeds. Borrowers at or below 50% DTI can already refinance. Those at 45% or below can use the existing HomeReady and Home Possible programs, which offer more savings to the borrowers. And for those borrowers between 45% and 50% DTI the savings are small. Roughly two-thirds of borrowers receive appraisal waivers when refinancing, so do not benefit from the $500 appraisal credit. And only borrowers with loans between $125,000 and $300,000 benefit from waiving the 50 bp upfront adverse market refinance fee.
As an example, consider a 47% DTI borrower with clean payment history that attempted to refinance last year. The 50 bp refinance fee was not charged before December, so that was not the reason the borrower failed to refinance last year. Many borrowers would have received appraisal waivers, so the refinance program offered last year was effectively the same as what they are being offered today. And how many of the borrowers that did not receive waivers walked away from a refi at historically low rates because of the appraisal fee? These borrowers have almost no added incentive to refinance compared to last year.
What matters most is if the borrower is over 50% DTI, because that completely blocked a refinance. But that is impossible to know without current data on borrower income. And requiring clean pay history likely prevents many of those loans from refinancing.
Fannie Mae’s analysis is qualitatively useful to identify pool types that have may have more exposure to the new programs, but the absolute levels likely substantially overstate the number of eligible borrowers that benefit from RefiNow and Refi Possible. Low loan balance pools have the greatest potential exposure, which is not surprising since lower income borrowers usually buy smaller homes. However, the natural convexity of those loans reduces any effect of these programs. Florida and Texas pools issued in 2016 through 2018, and 2019 vintage Texas pools, have somewhat more exposure. Exposure is lower in high LTV and low FICO pools. Investment properties are ineligible, so there is no exposure in 100% investor pools.
Fannie Mae’s RefiNow program is outlined here.
Freddie Mac’s Refi Possible program is outlined here.
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