Questions Dog GSE Refinance Initiative
While the Administration's new Homeowner Affordability and Stability Plan has had press gaggles focused primarily on issues surrounding loan modifications since its announcement earlier this week, the newly-minted HASP faces some tough questions around just how the GSEs expect to manage a refinance program that allows borrowers with an LTV between 80 and 105 percent to refinance into a new loan without additional credit enhancement. Perhaps the most pertinent issue involves the GSE's own charters, established by Congressional authority; those charters require credit enhancement on any loan purchased or guaranteed by either Fannie Mae (FNM) or Freddie Mac (FRE), when the loan-to-value ratio involved is above 80 percent. "The charters are most brief, and the language is clear any loan purchase must have either 80% LTV, mortgage insurance, or a 10% risk retention by the loan originator," Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tenn., wrote in a note to clients Friday morning. "So, one broad interpretation might be a refinance is not a purchase even if it files a new lien for a larger principal amount." More from Vogel: "The charter’s regulatory provisions never contemplated a GSE oversight body as created in 1992 or the all powerful czar formed in July, 2008. In the latest addition to the charter canon, last summer’s HERA, the Director is given oversight of the housing mission “only through activities that are authorized under and consistent with this title and the authorizing statutes (i.e. the charter)” [Section 1102, note and emphasis added]." For its part, the Federal Housing Finance Agency -- that "all powerful czar" Vogel referred to -- said Friday in a brief statement that it believes the refinancing initiative fits within the scope of the GSE's existing charters, but did not provide further details. "FHFA has indicated that Fannie Mae and Freddie Mac Refinance Initiatives to assist homeowners with high current loan-to-value mortgages would be a proper exercise of their existing authorities," the statement said. "The Enterprises intend to provide detailed implementation plans in the near term as the program is rolled out." The program is set to be rolled out on March 4. Fannie and Freddie have not responded to requests for comment, and a request for comment to the Mortgage Bankers Association -- traditionally a vocal opponent of GSE expansion on behalf of its members -- had not been answered by the time this story was published. It also seems that the FHFA was facing some fury from private mortgage insurers over the suggestion that the GSEs would be allowed to refinance borrowers into higher-LTV loans without the need for credit enhancement on those loans -- potentially costing an insurer an existing premium income stream, or new business. FHFA director James Lockhart responded to those concerns in a letter sent to the Mortgage Insurance Companies of America late Thursday, in which he made it clear that "we intend that the Enterprises would seek to carry forward to the new loan the existing mortgage insurance contract, where applicable." "At a minimum, this would be at the same dollar coverage and premium as exists with the existing mortgage," Lockhart said. "I encourage MICA member companies to work with Fannie Mae and Freddie Mac to ensure that the existing mortgage insurance coverage carries forward from the old loan to the new loan." But Lockhart also made it clear that borrowers originally below the 80 percent threshold, but now above that limit, would not be required to obtain mortgage insurance -- although he said that "the initiative does not preclude mortgage insurance from being obtained." If a brouhaha had been brewing, Lockhart's letter clearly seemed to placate at least some concern among MI providers. MICA president Kevin Schnieder said Friday a statement that MICA members appreciated what he characterized as an "important clarification" of the homeowner assistance program. The question of how the GSEs can manage a refinancing transaction above 80 percent and through to 105 percent without the need for credit enhancement, however, appears to remain an unresolved issue. "Do you think they tried this fluffy FHFA solution because there are so many other issues around the charter right now?" asked one source, an ABS/MBS analyst that asked to remain anonymous. "I think the manly thing to do is to give Congress the language and tell them to get it done pronto." Write to Paul Jackson at firstname.lastname@example.org. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.