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Federal Regulations Give Hope to Borrowers Wishing to Refinance

Posted by attorney Tiffany Floyd

While President Obama has proposed the Financial Crisis Responsibility Fee, it has not yet been taken up by lawmakers on Capitol Hill. The President has tried to push this same big-bank-tax through the channels twice before, in early 2011 and early 2010, but was unsuccessful.

The idea met with strong opposition from lawmakers and industry trade groups who threatened to take legal action had the Financial Crisis Responsibility Fee passed.

Under the President’s proposal, any borrower with a mortgage that is not currently guaranteed by Fannie Mae or Freddie Mac can qualify for refinancing through FHA if they:

  • Have been current on their payments for the past six months and have not missed more than one payment in the six months prior;
  • Have a FICO score of at least 580;
  • Have a loan that meets FHA conforming loan limits for their area; or
  • Are refinancing the mortgage on their principal residence.

Borrowers will apply through a streamlined process which the President says is designed to make it simpler and less expensive for both borrowers and lenders to refinance.

Borrowers will not be required to submit a new appraisal or tax return. To determine a borrower’s eligibility, a lender need only confirm that the borrower is employed.

Those who are not employed may still be eligible if they meet the other requirements and present limited credit risk. However, lenders will need to perform a full underwriting of these borrowers to determine whether they are a good fit for the program.

President Obama outlined additional steps to reduce program costs, including establishing loan-to-value (LTV) limits for qualifying loans. He says his administration will work with Congress to establish risk-mitigation measures which could include requiring lenders interested in refinancing deeply underwater loans (e.g. greater than 140 LTV) to write down the balance of these loans before they qualify.

President Obama also proposed creating a separate FHA insurance fund designated for the new streamlined refinancing program. He says this will help FHA better track and manage the risk involved and ensure the program has no effect on the agency’s Mutual Mortgage Insurance (MMI) fund – the principal insurance account that covers default claims on all single-family and reverse mortgages.

In addition, the President Obama says his administration has worked with the Federal Housing Finance Agency (FHFA) to streamline Fannie and Freddie’s refinancing program for non-delinquent borrowers. With the latest expansion of the Home Affordable Refinance Program (HARP), the GSEs have eliminated LTV restrictions, lowered their refinancing fees, and reduced borrowers’ closing costs.

The President is now calling on Congress to enact additional changes that he says will save taxpayers money by reducing the number of defaults on GSE loans.

“We believe these steps are within the existing authority of the FHFA. However, to date, the GSEs have not acted, so the administration is calling on Congress to do what is in the taxpayer’s interest," according to a statement issued by the White House.

President Obama wants Congress to eliminate appraisal costs for all borrowers participating in HARP by directing the GSE’s to use mark-to-market accounting or another alternative to manual appraisals on loans for which the LTV cannot be determined with the GSE’s automated valuation model (AVM).

The President’s legislative plan would also require the GSEs to implement the same streamlined underwriting for new servicers as they do for current servicers under HARP, in hopes of increasing competition between banks for borrowers’ business.

A key component of the President’s refinance plan centers on giving borrowers the opportunity to rebuild equity in their homes. All underwater homeowners who decide to participate in either HARP or the FHA refinancing program will have a choice. They can take the benefit of the reduced interest rate in the form of lower monthly payments or apply that savings to rebuilding equity in their homes by opting for a shorter loan term.

To encourage borrowers to go the rebuilding equity route, President Obama is proposing the legislation provide for the GSEs and FHA to cover closing costs when the borrower agrees to refinance into a loan with a term of 20 years or less, with monthly payments roughly equal to what they've been paying.

President Obama says this option would shave an average of $3,000 off each homeowner’s refinancing costs and would give the majority of underwater borrowers the chance to get back above water within five years or less.

The Agriculture Department, which supports mortgage financing for rural families through the USDA program, is also streamlining its process for refinancing to align with the plan outlined by the President.

FHA is making similar changes to its existing refinance program available to borrowers whose original loan is FHA-insured. To alleviate lenders’ concerns about refinancing without a full underwrite of the new loan, FHA will not include these loans in its assessments of lender performance.

President Obama admitted that the administration’s past efforts to counter the effects of the housing crisis haven’t produced the results that were initially promised.

“I’ll be honest, the programs we've put forward didn't work at the scale we’d hoped," President Obama told the crowd in Virginia. “Not as many people have taken advantage of it as we wanted.

“[N]o program or policy will solve all the problems in a multi-trillion-dollar housing market," President Obama continued. “What this plan will do is help millions of responsible homeowners who make their payments on time but find themselves trapped under falling home values or wrapped up in red tape."

President Obama closed with an appeal to Congress to act, to pass his plan, to help more families keep their homes.

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