FHFA Considers Expanding Refi Effortby Tim Manni
In an attempt to increase participation in the White House’s Home Affordable Refinance plan, Fannie Mae and Freddie Mac’s regulator is considering expanding the qualifications for the program. The Federal Housing Finance Authority (FHFA) is currently discussing whether or not to allow the GSEs to refinance mortgages with a loan to value (LTV) over 105%:
“We’re actively considering how to structure a program that makes sense over 105 percent,” Federal Housing Finance Agency Director James Lockhart said yesterday. He said a ratio of 125 percent “is a number” that’s on the table, though “not necessarily the number we’re going to end up with.”
Under the program, borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac who have loan-to-value ratios of 80 percent to 105 percent and aren’t delinquent can refinance without buying mortgage insurance, or paying for more insurance than they already have.
Expanding the program to a 125 percent loan-to-value level may benefit about 10 percent of borrowers that have loans backed by Fannie Mae or Freddie Mac, according to Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York. He said an additional 4 percent of borrowers with Fannie Mae or Freddie Mac loans are further underwater.
What’s stopping the FHFA from allowing the increase? According to National Mortgage News, “The 105% LTV limit theoretically allows Fannie and Freddie to securitize the newly refinanced loans and sell them to the Federal Reserve and other investors. However, raising the LTV might force the GSEs to hold the loans on their books.”
What happens when, theoretically, Fannie and Freddie increase the LTV to 125% and the refi initiative still falls short of the president’s goal of aiding 4-5 million borrowers? Will it increase to 130%, 140%, 150% LTV? When will it stop? If home prices continue to decline then the number of underwater borrowers is sure to grow along with new discussions of how to help those borrowers.
Since receiving billions directly from the U.S. government, Fannie and Freddie have gone from government-sponsored enterprises (GSE) to government-run enterprise. While no decision has been made yet, you can bet Washington is thinking that what’s “good” for the nation is “good” for Fannie and Freddie, even if it really isn’t good for Fannie and Freddie.