Moody’s says HARP refinances will outperform loans that didn’t enter HARP

Written By: Joel Palmer, Op-Ed Writer

The Home Affordable Refinance Program (HARP) has been a success for both homeowners and for Freddie Mac, according to a recent report by Moody’s Investors Service.

According to Moody’s, Freddie Mac HARP loans will continue to outperform loans that did not enter HARP following the 2008-2009 credit crisis. 

"Borrowers who qualified for a HARP refinancing benefited from significant payment reductions under the program," says Yehudah Forster, a Moody's senior vice president. "This credit strength is borne out in HARP loan performance, with loans originated between 2005 and 2007 that went into HARP having much lower delinquencies than non-HARP loans since 2009.”

The Federal Housing Finance Agency (FHFA) created HARP in 2009 to help homeowners whose homes dropped in value following the financial crisis. Those who are current on their mortgage payments, but have little to no equity in their homes, can refinance their mortgage through HARP.

Moody’s drew its conclusions based on Freddie Mac data. Loans originated between 2005 and 2007 that eventually went through HARP had a 60+ day delinquency rate of 1.14 percent. Loans originated during the same period that did not go through HARP carried a rate of 6.84 percent.

“Even 10 years removed from the financial crisis, the HARP program continues to be positive for borrowers, particularly those at the lower end of the credit spectrum,” according to Moody’s.

More than 3.4 million homeowners have refinanced through HARP, according to FHFA. As of last year, only 143,000 homeowners were still eligible to take advantage of the program.

HARP was extended through the end of 2018. In the meantime, Freddie and Fannie are implementing new high loan-to-value refinance programs. FHFA has said the new refinance offering will be “more targeted” than HARP. It would be similar to the outgoing program in that borrowers would not be subject to a minimum credit score, a maximum debt-to-income ratio, or maximum LTV. Appraisals would not “often” be required either.

The program change will limit eligibility to homeowners with mortgage loans that originated on or after October 1, 2017. FHFA said incorporating an eligibility date “was necessary to preserve the objectives of the Enterprises' credit risk transfer (CRT) program.”

Under the CRT, Fannie and Freddie have transferred a portion of risk on $1.6 trillion of unpaid principal balance with a combined risk in force of nearly $54.2 billion as of March 2017.  

FHFA said the two enterprises will modify the structure of future CRT transactions to accommodate the high LTV refinance program by allowing the newly refinanced loans to return to the reference pools in place of loans that prepaid.  This will help preserve credit loss protection on the loans without unwinding the protection paid for through CRT transactions.

Moody’s said HARP loans “will continue to underperform other post-crisis Freddie Mac loans that back CRT deals, due to the GSE's tighter underwriting guidelines for the non-HARP post-crisis loans. The 60+ day delinquency rate for HARP loans is higher than that for non-HARP Freddie Mac loans of similar seasoning and characteristics and that disparity, though with lower delinquency rates, remains even between seasoned, always-current HARP loans and newly originated Freddie Mac loans.”

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

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