Private mortgage insurers are welcoming a ruling by the regulator of Fannie Mae and Freddie Mac that it expects the companies to keep existing private mortgage insurance policies in place when refinancing loans under the Obama administration’s new foreclosure prevention initiative.

But the ruling also said borrowers who didn’t need private mortgage insurance when taking out their original loan will not be required to obtain insurance when refinancing — even if their loan-to-value ratio has climbed above 80 percent.

The foreclosure prevention initiative, announced Wednesday, calls for Fannie and Freddie to refinance 4 million to 5 million loans the companies already own or guarantee, on properties with loan-to-value ratios of up to 105 percent.

The initiative is aimed at homeowners who are current on their mortgages, but who might have trouble refinancing into a lower-cost loan because their loan-to-value ratio is greater than 80 percent.

Fannie and Freddie usually require some form of credit enhancement, such as mortgage insurance, for mortgages with a greater-than-80-percent loan-to-value ratio (a down payment of less than 20 percent).

Financially strapped mortgage insurers have been tightening their underwriting standards and insuring fewer loans, making it difficult for many borrowers who can’t come up with a 20 percent down payment to obtain loans backed by Fannie and Freddie.

The key to the new initiative is that it won’t require homeowners to obtain additional insurance on a refinance loan beyond what was already in place on their existing loan, said Federal Housing Finance Agency Director James Lockhart.

In a letter today to a trade group representing private mortgage insurers, Lockhart said regulators expect Fannie and Freddie to ask mortgage insurers to carry forward any existing mortgage insurance to the new loan at the same premium and coverage level.

If mortgage insurers agree to increase the amount of insurance on the refinanced loan, "so much the better," Lockhart said in the letter to the Mortgage Insurance Companies of America. "But in any event, our goal is to ensure that the existing mortgage insurance continues at the same dollar amount and price as with the original loan."

Lockhart said the refinancings are akin to loan modifications, in that Fannie and Freddie’s credit risk will actually be reduced when the loans are refinanced because borrowers will have a lower or "more stable" monthly mortgage payment not subject to rate resets.

MICA welcomed the ruling, saying it "makes clear that mortgage insurance will continue to (cover) loans that are sold to (Fannie and Freddie) with loan-to-value ratios above 80 percent, consistent with their charter."

But Lockhart said borrowers who didn’t need private mortgage insurance when taking out their original loan will not be required to obtain it when refinancing under the initiative, even if their loan-to-value ratio has since climbed above 80 percent.

Lockhart also said the initiative, scheduled to run until June 2010, places several limitations on refinancings, including a prohibition on cash-outs except to the extent money is needed to cover closing costs, association fees, property tax bills and insurance costs.


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