Fannie Mae and Freddie Mac released specific guidance Tuesday on how mortgage servicers and lenders will be implementing changes to the Home Affordable Refinance Program to help more underwater borrowers move into lower-rate loans.
In October, the Obama administration and the Federal Housing Finance Agency said the mortgage giants would lift the loan-to-value ratio cap, along with certain appraisal requirements, upfront loan-level price adjustment fees, and representation and warranties risk for participating lenders.
The program will be extended through Dec. 31, 2013.
For loans refinanced by the original servicer and currently hold an LTV above 80%, Fannie and Freddie waived the bank from representation and warranty liability for the original purchase mortgage documents, according to guidance sent to servicers Tuesday.
This means if the original documents on the loan were either fraudulent or missing before being sold to Fannie or Freddie the bank wouldn't have to buy back the mortgage.
"The lender is not responsible for any of the representations and warranties associated with the original loan," Fannie explicitly said in its guidance.
The servicer will also be relieved of rep and warranty liability on the new HARP refinanced loan if the data in the case file is complete, and the lender follows instructions gathering income, employment and asset documentation.
The GSEs will also clear banks from rep and warranty risk on the valuation, marketability or condition of the underlying property – unless the lender obtains an appraisal for the new HARP refinance.
However, the bank is still on the hook for any possible fraud it participates in or fails to detect.
There's a caveat. If the borrower goes to a new lender to refinance the loan under the new HARP rules, the rep and warranty risk on the essentially new loan transfers to the new lender, according to guidance from Freddie.
Fannie and Freddie will permit a borrower to have been delinquent on one mortgage payment in the previous 12 months as long as the delinquency didn't occur within the last six months.
Banks are allowed to solicit and advertise the changes to potential borrowers so long as they do so for both GSEs and for loans bundled into Fannie or Freddie MBS pools the bank is invested in.
HARP launched in March 2009. Roughly 838,000 Fannie Mae and Freddie Mac mortgages refinanced through the program since, but 58,000 had loan-to-value ratios above 105%.
Roughly 4 million Fannie and Freddie borrowers owe more on their mortgage than their home is worth.
Across all investor types, however, nearly 11 million are underwater in the U.S., roughly 22.5% of all outstanding loans, according to CoreLogic (CLGX: 14.56 +0.62%). Another 2.4 million hold less than 5% equity in their homes.
Royal Bank of Scotland analysts expect most of the loans impacted by the changes will have origination dates between 2006 and 2008.
While the largest lenders, servicers and insurers have committed to the new program, not everyone is participating.
United Guaranty, the mortgage insurance arm of American International Group (AIG: 25.0833 -0.23%), said many lenders will be using the revamped HARP to avoid representation and warranty claims on loans with fraudulent or missing paperwork. United said Tuesday while it supported the program, it was not going to waive its right to void policies in these instances.
Write to Jon Prior.
Follow him on Twitter @JonAPrior.
Sen. Scott Brown, R-Mass., reminded housing analysts this week that politicians have no real friends or enemies. They only have opportunities.
The junior senator from Massachusetts made headlines by breaking with his party and endorsing the nomination of Richard Cordray as director of the Consumer Financial Protection Bureau. The Hill confirmed Brown's endorsement this week after The Boston Globe initially reported it.
Cordray is President Obama's nominee to lead the new federal regulator. The nomination was thrown into the Senate after the bureau's chief architect, Elizabeth Warren, decided to challenge Brown for his Senate seat.
While Brown is clearly signaling that he favors Cordray over his opponent by supporting Cordray's nomination, he misses the point of his party's fight.
Members of the GOP have said they will not endorse a director — whether it's Warren or Cordray or anyone else — because the agency is structurally flawed in that it empowers one director to serve as top cop over the entire lending industry.
Employing a single director without the oversight of a board or commission essentially gives one person final say on how consumers access and use financial products in America.
At least, that was the argument of CFPB critics when Warren was considered a shoe-in for the post. Those who see the subprime meltdown as a failure of other government agencies are justifiably wary of large bureaucratic structures, be they well intended or not.
Even Indiana Attorney General Greg Zoeller, who has publicly expressed admiration for Cordray, admitted he could not support the appointment of a director until the bureau's structural issues are resolved.
"Not having a chairman confirmed is the only way the (Congress) can have a rethinking of the entire process, which is needed," Zoeller told HousingWire in September.
Brown's move is an odd one indeed. While Warren is his opponent, supporting Cordray — whether it's to spite his opponent or not — is inconsistent with the general argument of CFPB critics. The popularity contest of who leads the agency was never the issue. Should it be led by one person or a commission? Or is it needed at all?
The idea that the Cordray nomination somehow fixes what many considered structural flaws is sketchy at best. It only goes to show the real issues facing the housing industry are buried in the details. Meanwhile, politicians play on the surface of things, changing hats to win votes.
Since Cordray's nomination, critics of the CFPB's structural format have fallen silent. Apparently, there is a myth that playing musical chairs will silence voices of criticism. Then again, that doesn't appear to be a myth. It's a reality.
Write to Kerri Panchuk.
Tags: CFPB, Consumer Financial Protection Bureau, Elizabeth Warren, Lending, Richard Cordray, subprime
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