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HUD: Refinancing proposal removes put-back risk

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Shaun Donovan, secretary of the Department of Housing and Urban Development, said a federally induced refinancing program for mortgages held by Fannie Mae and Freddie Mac would remove some of the legal and financial issues preventing underwater borrowers from reworking their loan. It would do two things, Donovan told Bloomberg television. "While there are record low interest rates, we still have too many homeowners underwater who have not been able to take advantage of refinancing," he said. "There are millions more that could be eligible if we could remove some of the barriers. There are significant fees and risks of put-back lawsuits. We are working closely with the president to try and remove some of those barriers," the HUD secretary said. Federal Reserve Gov. Elizabeth Duke also warned put-back risk is preventing lenders from focusing on refinancing options. In a recent speech, Duke said that risk is the possibility a loan originator pushing for a refinancing will be forced to repurchase a loan from a GSE because the underwriting violated Fannie and Freddie guidelines. This fear is stalling the refinancing process, Duke said. Donovan reiterated those concerns telling Bloomberg lenders are concerned since "they don't want to take over prior risk." He also said high fees on mortgage refinancings and barriers in obtaining permission from holders of second mortgages are delaying the refi process. When asked if refinancing loans would essentially continue on the cycle of awarding risk, Donovan defended the plan saying "these are loans that are already on Fannie and Freddie's books and this will help improve the position for taxpayers and for Fannie and Freddie." The Congressional Budget Office said the plan would "relieve the originator of any obligation it may have had with respect to representations and warranties on the existing loan." Under CBO's analysis, the program would end up costing the government roughly $600 million, while only preventing 111,000 defaults long-term. Meanwhile, private bond investors would be left holding the bag with losses in the $13 billion to $15 billion range. Write to: Kerri Panchuk.

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