Goodman: Feds must move rep and warranty risk for new refis
A new refinancing surge for underwater homeowners will not happen unless the U.S. government moves the risk of buying back the mortgage should it default from the old lender to the new one, according to one expert. Laurie Goodman, a senior analyst at Amherst Securities Group, will detail how the government could allow more borrowers in negative equity to refinance into a lower rate in prepared testimony before a House subcommittee Thursday. President Obama said in September his new jobs bill would eliminate loan-to-value ratio caps and upfront fees to allow more borrowers an opportunity save on their mortgage payments. Most analysts and researchers agree the likely route will be a retooling of the Home Affordable Refinance Program. Launched in March 2009, more than 838,000 Fannie Mae and Freddie Mac borrowers received assistance through the program, but only 7.4% of them held LTVs between 105% and 125%. But eliminating fees and caps won't be enough. The largest spark the Obama administration could provide is by forcing Fannie and Freddie to waive future representation and warranty claims. "With all that uncertainty, I don't see how they could take loans without rep and warranties and without some assurances," said Stephen Ornstein, a partner in the capital markets practice at the financial law firm SNR Denton, in an interview with HousingWire. "It's unfathomable to me that they would waive them." So, Goodman provided a more eloquent solution. If the refinancing is done with a different originator or servicer than the old mortgage, the new firm must take the rep and warrant risk. If the new loan becomes delinquent within six months, Fannie and Freddie would conduct a review and force the new lender to buyback the loan it just refinanced. "Many originators believe that they are better off with a four-year-old loan with a clean pay history than refinancing the borrower and taking the chance that the loan becomes delinquent in the first six months," Goodman said in the testimony. "This can be easily fixed by attaching the pay history of the original loan to the new loans, and consider the combined pay history." But, there's another problem. During the financial crisis, as subprime lenders and servicers folded, reams of loans transferred to another servicer along with the rep and warranty risk. Bank of America (BAC) is currently dealing with that transferred risk from Countrywide Financial Corp. Goodman said the new servicer mitigated the risk through a separate policy with the originator of the loan. Should the servicer have to repurchase the mortgage, that firm would then go to the lender. This makes the servicer less than eager to do a HARP refinance if it loses this "back-to-back" rep and warranty policy with the originator. Often, however, as in the case with BofA, they're one in the same. "The most fundamental problem — if the same servicer is the only one who can refinance the borrower — is no incentive for that servicer to offer a competitive rate. If Fannie and Freddie were prepared to take the rep and warrant risk on the new loans, this problem would be eliminated, but it is inconsistent with the idea of conservatorship," Goodman said. Many other hurdles remain, including mortgage insurance transfers and the strain on bank profits, making a voluntary program less likely to perform well. But with a bold rep and warranty move by the administration or the Federal Housing Finance Agency, the largest domino could fall. "The solution, while certainly not simple, is to encourage, in a way only the U.S. government can, the transfer of the rep and warrant risk from the old provider to the new loan," Goodman said. "The borrower is less likely to default so the old provider is better off than if the borrower did not refinance at all." Write to Jon Prior. Follow him on Twitter @JonAPrior.