While mortgage interest rates are at their lowest levels since 1945, millions of mortgages that carry interest rates of 6 percent to 9 percent or even higher are not being refinanced. The reasons for this involve Fannie Mae and Freddie Mac, the two secondary market giants now in government conservatorships, in a central role.

The problem is perhaps best seen through the eyes of borrowers who are unable to refinance. Each unsuccessful borrower cited below is representative of a sizeable group of unsuccessful borrowers.

Adam was turned down for a refinance because he did not meet the new stiffer underwriting and pricing requirements set by the agencies in their standard programs. His credit score, which was acceptable when he got his loan before the crisis, is not high enough to meet the new requirements.

While mortgage interest rates are at their lowest levels since 1945, millions of mortgages that carry interest rates of 6 percent to 9 percent or even higher are not being refinanced. The reasons for this involve Fannie Mae and Freddie Mac, the two secondary mortgage market giants now in government conservatorships, in a central role.

The problem is perhaps best seen through the eyes of borrowers who are unable to refinance. Each unsuccessful borrower cited below is representative of a sizable group of unsuccessful borrowers.

Adam was turned down for a refinance because he did not meet the new stiffer underwriting and pricing requirements set by the agencies in their standard programs. His credit score, which was acceptable when he got his loan before the crisis, is not high enough to meet the new requirements.

It clearly was appropriate for the agencies to correct the excessively liberal rules that had prevailed during the go-go years, which contributed to the financial crisis. However, they have reacted to their excessive liberality before the crisis by becoming excessively restrictive in the aftermath. Their underwriting and pricing structures are designed to maximize their net earnings, as if they were still private firms.

Fannie and Freddie are now part of the government, and should set their underwriting rules and pricing adjustments not to maximize net revenue but to break even over a long time horizon.

Barbara is one of many homeowners who bought during the go-go years and who now owes more than her house is worth — she is "underwater." She applied for a loan under the Home Affordable Refinance Program (HARP) program, which was designed to make refinancing possible for underwater borrowers who are current on their payments and whose loans are owned by Fannie or Freddie.

Barbara is ineligible, however, because she is too far underwater. Her loan-to-value (LTV) ratio is 130 percent, and the agencies have set a 125 percent maximum.

A maximum LTV in the HARP programs cuts out a sizable segment of the potential market, for no good reason. The agencies are already on the hook for any losses on high-LTV loans, and a rate reduction can only reduce the probability that a default will occur that would trigger the loss.

Indeed, the reduction in expected loss from a rate-reducing refinance is larger on a 150 percent LTV than on a 125 percent LTV. The default rate has to fall only half as much on a 150 percent loan as on a 125 percent loan to generate the same reduction in expected loss.

Fannie and Freddie should scrap the LTV maximum in the HARP program, for which there is no rational reason, thereby also eliminating the need for appraisals on HARP loans.

Charley was turned down for a refinance under the HARP program, although his LTV was only 120 percent, which made him eligible under agency rules. Nonetheless, the lenders Charley approached would not make the loan. They told him that their maximum LTV was 105 percent, and some said that it was 95 percent. Charley could have refinanced if he knew where to go, but he didn’t and gave up the search.

I did a quick and dirty survey and found that HARP loans above 105 percent are not available from brokers or from smaller lenders who sell to wholesalers who in turn sell to the agencies. (The reasons, which involve agency relationships with lenders, are discussed at my website, www.mtgprofessor.com.) HARP loans exceeding 105 percent are available from only some of the lenders who sell directly to the agencies.

Freddie Mac has a list of HARP lenders at http://www.freddiemac.com/cgi-bin/homeowners/relief_refi.cgi, but it is extremely difficult to find. If Fannie has one, I could not find it. The Freddie list has 27 lenders, 14 of which do 125 percent loans, of which only four have a wide multistate presence: Aimloan.com, SunTrust Mortgage, Quicken Loans and RBC Bank.

Fannie and Freddie ought to do a better job of informing potential borrowers how to find a lender who will make 125 percent HARP loans, and they should review their policies that have discouraged broader lender participation.

Doris’s situation was the same as Charley’s, including an LTV of 120 percent, with one difference. Doris’s existing loan carries mortgage insurance (MI). The lenders who turned her down told her that the mortgage insurer had to agree to shift the MI policy to the new loan, but would not do so in her case.

Under HARP rules, if there is no MI on the existing loan, none is required on the new loan. If there was MI on the old loan, as in Doris’s case, it will be carried forward on the new loan, provided the PMI firm agrees. But if the current LTV exceeds 105 percent, they won’t agree unless the new loan is being made by the existing servicer.

Doris was not aware that only the lender servicing her loan can shift the mortgage insurance policy from the existing loan to a new one.

Fannie and Freddie ought to inform potential HARP borrowers who have mortgage insurance and LTVs greater than 105 percent that they can refinance only with their current lender, and they should examine whether there is anything they can do to remove the PMI roadblock.

Ethan is an underwater borrower in good standing whose loan is not owned by Fannie or Freddie. His only possibility of a refinance is the new FHA program I wrote about a few weeks ago, but that program requires the existing lender to write down the balance to 97.75 percent of house value. Since Ethan is making timely payments, the lender has very little incentive to do that.

Ethan had no say in who ended up owning his loan — from his perspective it was a coin toss that came up tails and made him ineligible for HARP. The out-of-luck group to which Ethan belongs includes a large number of subprime borrowers who meet their obligations faithfully while paying rates up to 9 percent and even higher.

There is no good reason why such borrowers have to be left entirely out in the cold. While including these borrowers in HARP would expose Fannie and Freddie to risks they did not have before, the agencies could set payment performance requirements and charge risk premiums large enough to protect taxpayers while still offering many of these borrowers substantial relief.

Treasury should have the agencies develop a HARP-1 program covering loans they do not now own that would be subject to underwriting rules and price adjustments consistent with the government breaking even.

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