Boxer bill leaves out reps and warrants refinancing risk
A bill introduced by Sen. Barbara Boxer (D-Calif.) would clear many barriers for underwater homeowners hoping to refinance into a new mortgage but it doesn't address one risk originators may be unwilling to take on. The Boxer bill would eliminate upfront fees and loan-to-value ratio restrictions Fannie Mae and Freddie Mac put on borrowers looking to refinance. Barclays Capital analysts pointed out Monday the Boxer bill does not address the representation and warranty risk that would transfer to the originator of a newly refinanced loan. Through rep and warranty claims, investors of mortgage-backed securities can hold originators accountable for soured loans they feel were not underwritten properly. Bank of America (BAC) recently agreed to pay $8.5 billion to a group of RMBS investors to settle rep and warranty claims and nearly $3 billion to Fannie and Freddie. "Rep and warranty risks reset when loans are refinanced, so refinancing a high risk loan transfers that risk to the originator of the new loan. Without alleviating this risk, we believe it is doubtful underwriting standards will ease, making a refinancing wave from the passage of the bill unlikely," BarCap analysts said. J.T. Smith, the chief investment officer of the boutique investment bank Aristar Funding Corp. said rep and warranty problems would "absolutely hold up" the Boxer bill. "The clock on rep and warranties start over as a refinance, and you have first payment defaults to worry about, early payment defaults within the first 12 moths, etc.," Smith said. "Repurchase waivers will be needed for an originator to consider it." Ross Miller, president of the Louisiana-based Miller Home Mortgage said since he started his own business in 1998 a lender has come back to him only once on a rep and warranty claim, which was eventually dropped. As an independent broker, Miller said he is bound by the program Fannie, Freddie or any bank creates. Only if a broker decides to stray from that program will that broker be held accountable, he said. "It's not an issue with me. Maybe that's because I try to be ethical," Miller said. "All we have is the menu at the restaurant, and we're selling what's on the menu. Right now, the menu is very conservative." Miller said he supports a program that would reduce the upfront cost for refinancing and even eliminate LTV restrictions. Brokers, real estate agents, title companies and even mortgage insurers would be on board simply because they have so little business these days, Miller said. Those on the investment side, however, have been more critical of such a move. Smith said the initial spike in foreclosures was caused by the option adjustable-rate mortgage resets, followed by unemployment and now the spread of negative equity. "Two of these are because of the inability of the borrower to afford their house any longer, but the underwater borrower has become one leading to strategic defaults," Smith said. "These borrowers that the 'Boxer Bill' targets are more apt to strategically default, than they are to default because of payment affordability." Write to Jon Prior. Follow him on Twitter @JonAPrior.