Freddie Mac eliminated the minimum credit score requirement for borrowers seeking a mortgage refinance from their existing servicer, as long as they have at least 20% equity in their home, according to guidance released Thursday.
The change goes into effect for any refinances with a settlement date on or after Jan. 5. Previously, Freddie required at least a 620 credit score before allowing such a high-equity refinance to take place.
In October, the Federal Housing Finance Agency instructed Fannie Mae and Freddie to remove barriers to allow more borrowers to take advantage of historically low interest rates through the Home Affordable Refinance Program.
Rates on most mortgage products began 2012 still below 4%. The government-sponsored enterprises removed upfront fees, limits on loan-to-value ratios and certain representation and warranty risk on the old loan file.
The GSEs took other steps since to fuel even more refis. In December, Fannie eliminated the requirement on lenders to determine the borrower’s ability to repay. The reasoning behind the new policy changes was to help more underwater borrowers stay current on their loans. With the latest adjustment Thursday, Freddie is targeting borrowers with high levels of equity as well.
In November, a group of Senators sent a letter to President Obama urging the administration to expand the changes to make it easier on borrowers with high levels of equity to refinance as well.
“Not only is this an issue of fairness, but applying these measures to higher equity borrowers makes good business sense,” wrote Sens. Barbara Boxer, D-Calif., and Johnny Isakson, R-Ga., who led the letter.
Fannie and Freddie refinances spiked in September, according to the FHFA. More than 263,700 GSE mortgages refinanced that month, up from 197,000 the month before. It was the highest total since March.
But the overwhelming majority of refinances came on high-equity loans. Of the refinances in September, only 35,000 had LTVs above 80%.
Roughly 4 million Fannie and Freddie loans are underwater.
Write to Jon Prior.
Follow him on Twitter @JonAPrior.