WASHINGTON -- Mortgage bankers are pushing Fannie Mae and Freddie Mac to offer relief to homeowners who have been shut out of the refinancing boom because of low home equity.
Lenders are asking each agency to buy refinanced mortgages with loan-to-value ratios of up to 95 percent. Currently, the agencies limit their purchase of refinanced loans to those with loan-to-value ratios of 90 percent or less.
A loosening of the limit could give a lift to refinancings in the Northeast and California, where weak home prices have left many homebuyers trapped with high-rate mortgages.
Lender Pressure Mounts
The agencies -- formally the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. -- said they were studying the lenders' recommendations.
Lender pressure on the agencies comes as Countrywide Credit Industries and a prominent member of Congress have initiated steps to address the problem.
A securitization unit of Countrywide recently launched a program to securitize refinanced loans with loan-to-value ratios of up to 100 percent. That market, the company estimates, is as large as $500 million and is concentrated in California.
Impact on 2 Groups
Meanwhile, Rep. Joseph Kennedy 2d, D-mass., has introduced a bill to create a federal insurance agency that would guarantee the first 5% of a no-equity loan. Two groups of consumers would be affected by a change in the rules.
First, there are homeowners whose homes have lost value because of falling prices, and whose equity is now below agency guidelines.
Second, there are young homeowners who simply put little money down when buying their homes. Fannie and Freddie buy purchase-loans, where homeowners put down as little as 5% toward the house.
"It's a little tough for us to have made a 95% loan to a customer for a year and a half, and now we have to tell them, |You were a good loan back then, and you're not [now]'" said a source close to the Fannie Mae liaison committee of the Mortgage Bankers Association of America.
That panel and a similar one that works with Freddie Mac took up the issue last month in closed-door meetings during the trade group's annual convention.
Sources close to both committees indicated that the agencies were trying to balance consumer and lender pressure against investor and stockholder interests on this issue.
Could Injure Big Servicers
More refinancing by home owners means more prepayments -- a development that could upset investors and big servicers.
Also, a changed policy would deepen the agencies' involvement in markets with falling home values, such as California. The steepest declines in California home values, however, have occurred at a higher end of the market than the agencies
In an interview, Ann Logan, executive vice president for credit policy at Fannie Mae, acknowledged that the company is examining the "credit implications" of changing its policy.
Reliance on Appraisals
"The reason we have capped [the loan-to-value ratio] at 90 percent [is] it's much harder to set a true value without a willing buyer and a willing seller," Ms. Logan said.
Lenders rely solely on appraisals to gauge the value of the property in refinance transactions. At high loan-to-value ratios, errors could leave lenders with loans where they've lent more than the property is worth.
"When you're at 95% loan-to-value ratio, that has some validity," said a source close to the Freddie Mac liaison committee. But "there will be private mortgage insurance. If it's deep enough, one can always reduce the risk off Fannie Mae and Freddie Mac." the source said.
Also, borrowers who have a track record of making regular payments on a high-rate mortgage would be better credit risks at lower rates, the source said.