- - Thursday, October 20, 2011

In recent columns, I have expressed my frustration over the overreaction to the mortgage meltdown and how it has resulted in an overtightening of mortgage underwriting guidelines.

Fannie Mae and Freddie Mac, the two giant companies that purchase mortgage loans from banks, went bust in 2008. Officially in a conservatorship, the companies are under the supervision of the Federal Housing Finance Agency (FHFA).

My gripe is simple: While Fannie Mae and Freddie Mac are continuing to buy mortgage loans from lenders, the over-the-top underwriting guidelines are prohibiting many qualified borrowers from taking advantage of the lowest rates in 50 years.

The best example is Fannie and Freddie’s refusal to take savings and assets as considerations for loan approval if an applicant’s income is insufficient. A retiree, for example, may have a million dollars in the bank, with his only income being Social Security payments and a small amount of interest.

Even though he has 20 years of the required income already earned and in the bank, he cannot refinance because his tax returns show insufficient existing income. It’s ridiculous.

Another huge segment of homeowners unable to refinance is the folks who have lost value in their property because of the downturn in the housing market. Even though these folks have great credit, income and savings, they don’t meet the loan-to-value requirements.

Regardless of the fact that refinancing would improve their financial position and thus improve their credit risk, they are stuck with paying a higher interest rate.

The Home Affordable Refinance Program (HARP) was introduced a couple of years ago to address this issue, but its success has been disappointing because of technicalities. Folks paying private mortgage insurance and those who have second trusts, for example, are ineligible for a HARP refinance.

All of this could change. Treasury Secretary Timothy F. Geithner recently told National Public Radio in an interview that the FHFA is likely to make some meaningful changes to Fannie and Freddie’s underwriting policies that would open the door for more homeowners to refinance.

Below are some of the changes the FHFA is considering:

  • Remove HARP’s eligibility date. Currently, if your loan was originated after June 2009 you’re ineligible.
  • Eliminate the 125 percent loan-to-value cap. Currently, a HARP loan cannot exceed 125 percent of the home’s value.
  • Streamline the application process and make it cheaper. The FHFA is considering waiving appraisals, title insurance and other requirements to reduce fees. Basically, if a borrower has good credit and his financial situation is good, he will be eligible for a refinance as long as he doesn’t increase his current loan amount.
  • Require second-trust holders and private mortgage insurance companies to automatically approve a refinance. This is not happening currently.
  • Indemnify lenders against loan buybacks. It’s pretty obvious to me that Fannie and Freddie are searching for ways not to buy closed loans from lenders. This is why a refinance applicant should expect to be turned into a circus bear to get the refinance approved - unless some changes are made.

If the FHFA is moderately successful in making these changes, the current refinance wave could turn into a tsunami. Let’s hope it gets done before interest rates go back up.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.