The Sticking Point on GSE Refis: Reps and Warranties
The Obama Administration's efforts to expand a GSE refinancing program and reach a large number of underwater borrowers will depend on how far the Federal Housing Finance Agency will go in providing lenders relief from loan buy-backs, according to industry officials and analysts watching the effort.
Currently, the White House is working with FHFA to revamp the Home Affordable Refinancing Program, making it more accessible for borrowers with negative equity.
But to get there, lenders will need relief from representations and warranties that entitle Fannie Mae and Freddie Mac to be reimbursed for losses on poorly underwritten loans that default.
Under these 'reps and warranties' Fannie and Freddie are currently collecting $1 billion to $2 billion a quarter from lenders.
While the objective of the refinancing effort is aimed at GSE borrowers with negative equity who are still current on their mortgages, lenders will remain reluctant to participate if they are assuming another lender's buy-back risk.
Today, servicers only refinance underwater GSE loans that are in their portfolios. R&W relief might encourage other lenders to refinance the servicer's loans.
Federal Reserve Board governor Elizabeth Duke recently said the risk that Fannie and Freddie will require lenders to buy back the loan and reimburse the GSEs' for any losses is one of the major "frictions" impeding HARP refinancings.
"Perhaps competition among potential lenders could be increased if a minimum number of timely payments could be used as a proxy for sound original underwriting to relieve the liability of the refinancing lender," Duke said at a Fed sponsored housing conference.
Friedman, Billings Ramsey policy analyst Edward Mills said R&W relief is "key" to a successful refinancing program that will reach a large number of borrowers with high loan-to-value ratios.
He suggested that R&Ws could be waived if the borrower has been current on their existing mortgage for a certain period of time. Or it could be on a forward-going basis, where the R&Ws expire after the borrower complete three years of timely payments on the new loan.
That would provide "some certainty" for lenders to refinance these GSE loans, Mills said.
The HARP program has refinanced over 700,000 borrowers with LTVs greater than 80% and up to 105% since the refinancing program was launched in April 2009.
When it comes to Fannie and Freddie mortgages with LTVs greater than 105% and up to 125%, only 62,400 of those underwater loans have been refinanced so the borrower can take advantage of low mortgage rates and get some payment relief.
The Obama administration wants to expand the HARP and eliminate the 125% LTV cap. Lenders are okay with that – but fear they could be hammered by buybacks if the mortgages eventually go bad.
Negotiations with FHFA over the HARP program have been going on for a few weeks.
Treasury secretary Timothy Geithner told the Senate Banking Committee Thursday that the White House refi plan should be unveiled in the next couple of weeks.
"I think it can make a big difference,” Geithner said. “And you're going to see from the FHFA director, maybe in the next couple weeks, very detailed proposals.”