Freddie Mac’s Refinancing Policy

By: Kerri M. Smith

NPR and ProPublica charged Freddie Mac with investing in securities that would lose value if homeowners refinanced their mortgages. The primary allegation is that such investments undercut Freddie Mac’s public mission and resulted in a more stringent refinancing policy.

To bolster its claim that Freddie Mac adopts policies that make refinancing more difficult, NPR alleges that “Freddie Mac has been tightening lending restrictions.” It also cites to criticism by the Federal Reserve that GSE fees charged to refinance may have stymied the refinance market. Recent evidence suggests, however, that at least with respect to certain refinancings, Freddie Mac has relaxed its requirements and has decreased certain fees, in contrast to current allegations.

In October of 2011, FHFA (Freddie Mac’s regulator) announced a series of changes to the Home Affordable Refinance Program, dubbed HARP 2.0, aimed at promoting the refinancing by current borrowers of underwater mortgages owned or guaranteed by the GSEs. HARP was revamped to eliminate loan-to-value ratio caps, appraisal requirements and some representation and warranty risk for lenders. The idea was that the GSEs already had the risk of loss on loans they owned or relating to securities they guaranteed so why not let borrowers take advantage of lower interest rates and lessen the risk of default even if the borrowers would not qualify under traditional underwriting criteria.

HARP 2.0 loosens refinancing criteria by:

• expanding borrower eligibility

• reducing lenders’ repurchase risk; and

• streamlining certain requirements, easing implementation.

The removal of the 125 percent loan-to-value (LTV) ceiling clearly expands the population of potentially eligible borrowers. In addition, FHFA has agreed to waive certain representations and warranties on loans refinanced through the program. When a mortgage is refinanced, the original representations and warranties may attach to the refinanced loan. With a waiver of many (but, if underwritten manually, not all) representations and warranties, the new lenders will be less at risk for earlier defects, such as repurchase demands based on borrower misrepresentations, although they retain the risk for systemic fraud. The hope is that minimizing the risk of pre-existing underwriting deficiencies will induce more lender participation. FHFA also hopes to spark more HARP activity by lifting the ban on soliciting borrowers of certain mortgages (i.e., LTV ratios greater than 80%) for refinancing.

Other notable improvements include permitting the use of an AVM rather than a new appraisal and permitting a 30-day delinquency in the past 7 to 12 months if the loan is underwritten manually.

HARP 2.0 also addresses the criticisms by the Federal Reserve that the GSE fees for refinancing are too high. Effective January 2012, HARP 2.0 eliminates certain risk-based fees for those who refinance into a shorter loan, such as a 20-year mortgage, and reduces those fees for HARP loans with longer terms to .75%. FHFA is attempting to make HARP loans (and, in particular, shorter term HARP loans) more attractive to borrowers, as well as lenders.

More recently, Freddie Mac has loosened its refinancing requirements for loans with an LTV of 80% or less. For example, under certain circumstances, Freddie Mac eliminated the minimum “Indicator Score” (like a FICO score) unless the principal and interest payments are expected to increase by 20% or more. For those loans with an LTV of 80% or less, Freddie Mac also eliminated the maximum total LTV and home equity line of credit total LTV, making it easier for borrowers to qualify for a refinance.

While NPR and ProPublica claim that Freddie Mac has been tightening refinancing standards, Freddie Mac’s recent initiatives, including its promotion of HARP 2.0, suggest a different course, at least for underwater mortgages.