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FM Commentary

Giving More American Borrowers the Option to Refinance

Andrew Bon SalleIn this economic climate, it is very important that responsible homeowners who have made their mortgage payments on time have the opportunity to refinance. Refinancing allows borrowers to take advantage of lower interest rates, save on monthly payments, and generally enter into more stable and sustainable loans. This is not only good for families, but also good for Fannie Mae as borrowers with lower payments are more likely to stay current on their mortgages. We have been and will continue to be committed to allowing responsible borrowers to refinance so that consumers can reap the benefits.

Refinancing has been a very important part of our business over the last three years. Between 2009 and 2011, refinances made up 78 percent, or more than $1.4 trillion worth, of the loans that Fannie Mae purchased or guaranteed. According to the Federal Housing Finance Agency (FHFA), more than 10 million homeowners have refinanced through Fannie Mae and Freddie Mac and over 900,000 borrowers have done so through the Home Affordable Refinance Program (HARP) – the refinance program available to “underwater” borrowers who owe more on their loans than the value of their home but have stayed current on their mortgages.

Where Fannie Mae owns or guarantees a borrower’s original loan, Fannie Mae’s standards for a refinance under the Refi Plus™ program are streamlined. In general, being current on the mortgage, having a stable pay history over the past 12 months, and employment verification are the only standards that Fannie Mae requires borrowers to meet. Additional requirements, such as minimum credit score and debt-to-income ratio, are typically only considered by Fannie Mae when the borrower’s payment increases by more than 20 percent, which may occur if the borrower chooses a shorter loan term in order to build equity faster.

It is important to understand that Fannie Mae only operates in the secondary market and can only purchase or guarantee mortgage loans originated by lenders. We are not permitted to offer loans directly to consumers (in the primary market). Therefore, borrowers must contact their mortgage company directly, or another lender, in order to refinance their loans. With a refinance, borrowers receive a completely new mortgage in place of the previous mortgage – with new terms, interest rates, and monthly payments. 

Toward the end of last year, FHFA, Fannie Mae, and Freddie Mac announced HARP 2.0, which made significant changes to the program to remove some perceived barriers and make refinancing possible for even more borrowers. In addition to removing the limitation regarding loan-to-value ratio, so that even severely underwater borrowers can now refinance, Fannie Mae will be significantly increasing the use of property fieldwork waivers eliminating the need for new property appraisals. 

We have also eliminated most of the lender representations and warranties on the original loan, which could have required a lender to repurchase the loan if it were found to be defective. It is important to note that there have not been significant repurchase requests on our acquisition of loans originated in 2009 or later. For instance, we have requested repurchase on less than one-quarter of 1 percent of all loans originated in 2009. Despite this fact, we believe lenders will be more inclined to refinance loans with the elimination of this liability. 

Finally, under HARP 2.0, we have eliminated certain risk-based fees, known as loan level price adjustments (LLPAs), for loans with terms of 20 years or less, and capped them at 0.75 percent for loans with terms of longer than 20 years. This important change will allow more underwater homeowners to refinance into more affordable loans. 

Since HARP 2.0 was announced, refinances and borrower interest in the program have significantly increased. From September through December 2011, Fannie Mae enabled approximately 72,000 borrowers to refinance through HARP. While we expect that the changes will result in Fannie Mae acquiring more refinancings in 2012 than we otherwise would have, we still expect fewer refinancings overall than in the last two years because so many borrowers have already refinanced to low rates.

Andrew Bon Salle
Senior Vice President
Underwriting & Pricing

April 2, 2012

The views expressed in these articles reflect the personal views of the authors, and do not necessarily reflect the views or policies of any other person, including Fannie Mae or its Conservator. Any figures or estimates included in an article are solely the responsibility of the author.

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