In an attempt to boost participation in the Obama administration’s mortgage refinance program, Fannie Mae and Freddie Mac will release lenders who sign off on a refinanced loan from some legal liabilities associated with the original loan.
Mortgage market analysts view the waiver of so-called seller servicer "representations and warrants" on Home Affordable Refinancing Program (HARP) loans as the most significant of a series of changes announced today by Fannie and Freddie’s regulator, the Federal Housing Finance Agency.
Fannie and Freddie will also lift the current 125 percent loan-to-value (LTV) cap on HARP refinancings, and sign off on refis without an appraisal if they have reliable automated valuation model (AVM) estimates for the property.
The new HARP guidelines also eliminate some risk-based fees if homeowners refinance into shorter-term mortgages that will get them out from negative equity situations more quickly.
A homeowner with a $200,0000 loan on a home worth only $160,000 would be able to pay their loan balance down to that level in 5 1/2 years by refinancing into a 20-year loan at 4.5 percent interest, FHFA said, compared to 10 years with a 30-year loan at the same rate.
The HARP program was originally designed to help "responsible" borrowers with little or no equity in their homes refinance without having to purchase additional private mortgage insurance.
Although the initial 105 percent LTV cap was raised to 125 percent just a few months after HARP’s February 2009 launch, lenders have been reluctant to refinance underwater borrowers and the program has fallen short of its original target of helping as many as 4 million homeowners refinance.
According to the latest numbers from FHFA, Fannie and Freddie had completed nearly 894,000 HARP refinancings through August, but only about 72,000 were mortgages with LTVs greater than 105 percent.
Data aggregator Lender Processing Services has estimated that 23 percent of an estimated 46 million homes whose owners are current on their mortgages — nearly 11 million homes — are underwater. LPS calculates that about 72 percent of homes in foreclosure have negative equity.
Only borrowers who are current on a mortgage sold to Fannie and Freddie before June 1, 2009 are eligible for the HARP program. Originally scheduled to phase out this year, FHFA said today the program will continue through the end of 2013.
In announcing the program changes, FHFA said it hoped to see HARP refinancings at least double from today’s level by the time the program winds down, which would equate to roughly 1 million refinancings.
Those refinancings would come at the expense of investors in the mortgage-backed securities (MBS) backed by the loans being refinanced. Because those investors include the Federal Reserve, Treasury and Fannie and Freddie themselves, taxpayers would share in that burden, which would be partially offset by a reduction in foreclosures.
Earlier this year the Congressional Budget Office estimated that a hypothetical program that produced 2.9 million refinancings could prevent 111,000 defaults, costing taxpayers $600 million and private investors $13 billion to $15 billion.
Dow Jones Newswires reported that prices for MBS issued by Fannie and Freddie fell today after investors were surprised by the extent of the changes to the HARP program.
The new policy "runs the risk of alienating the investors that provide the bulk of all credit to homeowners" Dow Jones reported, citing warnings earlier this month from the Mortgage Bankers Association that mortgage rates could go up if investors lose their enthusiasm for MBS. Bond prices and yields move in opposite directions, so reduced demand for MBS drives up mortgage rates.
MBA President and CEO David Stevens said in a statement today that the mortgage industry welcomes the changes to the HARP program. Lenders "are particularly gratified" by the decision to grant lenders relief from some representations and warranties in originating new HARP loans, he said.
While the changes "are not going to be a silver bullet to solve all the issues facing our housing market … they will offer lenders another tool to help borrowers and hopefully help bring some stability to housing markets, particularly those most impacted by home-value declines," Stevens said.
The "reps and warranties" that protect Fannie and Freddie from losses on defective loans usually show up "in the first few years of a mortgage and so the value of the reps and warrants decline over time," FHFA said in justifying the new incentive.
"These are seasoned loans made to borrowers who have demonstrated a capacity and commitment to make good on their mortgage obligation through a period of severe economic stress and house price declines," FHFA said.
On a conference call with reporters, FHFA acting director Edward DeMarco said lenders would still be liable to claims of mortgage fraud on the original loan.