Lenders finally got Fannie and Freddie to toss out their policies of refusing refinances to borrowers with low home equity, but lawmakers think the lifeline the agencies are throwing consumers isn't long enough.
The agencies report that as many as 118,000 households could be eligible under the new programs. However, legislation introduced Nov. 15 by Rep. Joseph Kennedy, D-Mass, would create an FHA-insured program that would extend coverage to even more-namely the refinance-minded homeowners whose loan-to-value ratios exceeds the new 95% limit set by Fannie, up from 90%. Freddie Mac announced an identical program Nov. 24.
The GSE programs dovetail with Kennedy's Home Refinancing Assistance Act, H.R. 3296, but differs in that the legislation would reach homeowners with less than 5% equity. And while pleased with Fannie's initiative, House Banking Committee sources said it still wasn't the answer because a large number of homeowners, particularly in the Northeast and California, would still be unable to refinance.
Kennedy initiated the legislation because many borrowers in his home state of Massachusetts found themselves as owners of "underwater" mortgages, or loans that had declined in property values, making it impossible to refinance.
Because lenders rarely offer borrowers more money than a house is worth, and because it's illegal in many states for private mortgage insurers to insure mortgages beyond 95% of a home's value, the 25-year-low interest rates held little meaning to many homeowners who have found themselves on the outside looking in during the refi boom--and stuck with high interest-rate payments.
That problem was also on the minds of mortgage bankers who pleaded with Fannie and Freddie to alter their policies during the Mortgage Bankers Association Convention in Chicago Oct. 26 to 28. Fannie threw out its signature 90% loan-to-value limit and replaced it with the new 5% threshold Nov. 19.
"It's the No. 1 thing we asked of both agencies." Robert O'Toole, an MBA senior staff vice president said of the agencies' 10% equity rules. Fannie Mae had been set against any change, but it nonetheless altered its policy after it said it received a bevy of requests from its mortgage banking customers.
However, while lender interest was undoubtedly a factor, the agency may have also felt some political pressure to change its guidelines after Kennedy spoke with Fannie Chairman Jim Johnson while seeking advice on details for his bill.
Regardless of how it came about, lenders--which will now be able to reach a previously untapped reservoir of soon-to-be-refinancing homeowners--are applauding the change. But placing a figure on the number of homeowners that will be eligible is hard to do, said Kevin Hawkins, a Fannie Mae spokesman.
Countrywide Funding Corp. of Pasadena, Calif., the largest mortgage lender in the country, also believes the program will reach a significant number of people through Fannie's program and it intends to implement it quickly.
"I believe that 10% to 15% of the total [Fannie] refinance market may be affected," said Rick Cassano, executive vice president of production at Countrywide.
Extending credit to homeowners with little or no equity in their homes can be a risky business--a homeowner with no equity doesn't have much to lose during hard times and may choose to default rather than continue mortgage payments.
Fannie Mae said it put itself in a good position to manage those risks by ensuring that only loans it has invested in or securitized are eligible. Because it has already been monitoring those loans and knows the borrower has been making payments, some of the risk is diminished.
It also makes sense, Fannie said, that if a borrower has been making $1,000-a-month mortgage payments, he should be able to remain a good risk making a lower $800-a-month payment after refinancing.
