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). 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), 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.

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