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Refinance rules change for some underwater mortgages
Old 10-24-2011, 07:59 AM   #1
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Refinance rules change for some underwater mortgages

Calculated Risk posts this morning some news (reported by WSJ) that will benefit homeowners with mortgages guaranteed by Fannie Mae or Freddie Mac. Calculated Risk: WSJ: Details on New FHFA Refinance Program, No LTV Limit, Eliminate appraisals

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Federal regulators on Monday plan to unveil a major overhaul of an under-used mortgage-refinance program ... The overhaul will, among other things, let borrowers refinance regardless of how far their homes have fallen in value ...

The plan will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments ... Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.
...
Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1 ... Loans that exceed the current limit of 125% of the property's value won't be able to participate until early next year. The program's expiration date ... will be extended through 2013. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.
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Old 10-24-2011, 09:18 AM   #2
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A few more details. This looks like something that would interest members here that have complained about difficulty refinancing. It also reduces the cost.
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  • No more appraisals. The new rules eliminate the appraisal requirement, which means that no matter how far underwater your home is, you can qualify.
  • No more extensive underwriting requirements. If you have a slight blemish on your credit history, you should still qualify.
  • You have to be current on your loan. At least, you have to have made the last six payments on time and in full, so if you are behind on your loan - even if the lender told you should stop paying - you wonít qualify.
  • Fannie Mae and Freddie Mac will waive some new fees. This boosted up the cost above what it would pay for some homeowners to refinance.
  • An estimated 1 million homeowners should be able to refinance. If they can save at least $200 per month, thatís billions of dollars in savings.
Full details are likely to be available sometime this week.


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Old 10-24-2011, 11:01 AM   #3
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I don't think you'll need to be underwater to utilize this.
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Old 10-24-2011, 11:51 AM   #4
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Interesting. We'll need to see the details, and I haven't really thought through the effects of what we do know, but it seems positive to me.

Allowing one to re-fi to lower rates, even if they would not qualify for a new loan, seems to help things. That person has a lower monthly payment, they're not any more 'upside-down' than they were, so no 'harm' there. They are now less afraid of losing their home, so they can be a little free-er in spending the higher discretionary income they now have.

And I think on average, it leaves the banks in a better position. There is less chance of getting stuck with a poorly maintained (maybe even a stripped-out) home to try to sell.

All in all, (unless I'm missing something), this seems to add stability to the market and the economy, and that seems to be the most important thing in fighting the Catch-22 of less-hiring-because-fewer-are-spending-because-of-fear-of-losing-their-job-because-there-is-so-little-hiring.

Sounds like a step in the right direction. Twenty or 30 more ideas like this, and the economy might just pick up a bit.

Anyone see any downside? Will mortgage makers lose out if rates rise? Do these need to be variable rate, so we don't just create a problem down the road if rates rise?

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Old 10-24-2011, 12:14 PM   #5
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Well, it's not like the higher payments folks are now making are being flushed down the toilet. The higher interest rates on these still-performing loans are helping the banks who made the loans (the banks we just bailed out a few years ago, and which are still going under).

Buying votes? "The government made the bank reduce my mortgage payment, I like that government."

Are we trying to use homes to artificially pump money into the economy again? Didn't we learn anything from the last time we did that? Is the government (i.e. you and I) still on the hook if these artificially low-priced mortgages (i.e. loans that private mortgage lenders won't write because of lack of supporting home value or lack of supporting good credit by the borrower) go sour?
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Old 10-24-2011, 12:24 PM   #6
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Originally Posted by samclem View Post
Are we trying to use homes to artificially pump money into the economy again? Didn't we learn anything from the last time we did that? Is the government (i.e. you and I) still on the hook if these artificially low-priced mortgages (i.e. loans that private mortgage lenders won't write because of lack of supporting home value or lack of supporting good credit by the borrower) go sour?
I hear ya, and agree in concept. However, to the extent the govt got us into this mess, maybe we need them to help unwind it?

Sure, the banks will be getting lower interest rates overall, but is that offset by more people making their payments and less loss with fewer homes being handed over to the banks (in bad shape)? And if it overall helps stabilize the economy, that's another plus.

It's not like they are just wiping away the debt - this is just allowing a re-fi in spite of the upside-down nature (which isn't going to change due to this). Seems like it could help.

Maybe there should be more strings attached - limits on any other borrowing until they get back to 25% equity on the loan?

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Old 10-24-2011, 12:47 PM   #7
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Originally Posted by gerntz
I don't think you'll need to be underwater to utilize this.
I will need to follow this. I used HARP not because I was underwater, but because I was able to refi at a lower rate with minimal costs including no appraisal. At that time I got 4.83% 30 year, little over a year ago. Might be worth my time if I can access it again, but I bet it's only a one time per person program.
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Old 10-24-2011, 12:56 PM   #8
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Originally Posted by ERD50 View Post
Sure, the banks will be getting lower interest rates overall, but is that offset by more people making their payments and less loss with fewer homes being handed over to the banks (in bad shape)?
I'm sure there are cases where it would be good for the lender (fewer foreclosures= lower costs), can't they just agree to do it? If not (e.g. there's some FM/FM stipulation against renegotiating a loan that is underwater), then it would seem best just to allow the lenders to renegotiate the terms (where it makes sense to both parties) rather than forcing them to do it.

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And if it overall helps stabilize the economy, that's another plus.
I think we may be better served by keeping the issues separate and not trying to "help" the economy by artificially reducing mortgage rates for troubled loans. Co-mingling them is how we got in trouble the last time.
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Old 10-24-2011, 01:08 PM   #9
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Originally Posted by samclem
I'm sure there are cases where it would be good for the lender (fewer foreclosures= lower costs), can't they just agree to do it? If not (e.g. there's some FM/FM stipulation against renegotiating a loan that is underwater), then it would seem best just to allow the lenders to renegotiate the terms (where it makes sense to both parties) rather than forcing them to do it.

I think we may be better served by keeping the issues separate and not trying to "help" the economy by artificially reducing mortgage rates for troubled loans. Co-mingling them is how we got in trouble the last time.
Sam, you got me thinking. When I called Wells Fargo a year ago, which my originator, I was just inquiring about a regular refi. They told me to use the HARP. I told them I thought you had to be under water, and they said no. Looking back it seems like they were eager for me to use it. I was fine with it as it was cheap and a breeze to do, but they wanted to go that way originally not me. I wonder why.
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Old 10-24-2011, 01:16 PM   #10
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These are not troubled loans and nobody is forcing banks to do anything. They are as anxious to refinance underwater mortgages as homeowners. The problem is lending rules don’t allow that in too many cases. All this does is let homeowners with negative equity have the same opportunity to refinance at a lower rate as other homeowners.

Allowing people with positive equity to take advantage of lower rates but denying people with negative equity the same opportunity is not sound economic policy.
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Old 10-24-2011, 01:33 PM   #11
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These are not troubled loans and nobody is forcing banks to do anything. They are as anxious to refinance underwater mortgages as homeowners. The problem is lending rules don’t allow that in too many cases. All this does is let homeowners with negative equity have the same opportunity to refinance at a lower rate as other homeowners.

Allowing people with positive equity to take advantage of lower rates but denying people with negative equity the same opportunity is not sound economic policy.
I don't know if there's an official definition of a "troubled loan." I'd say bankers stuck with negative equity loans (e.g. loans for which the bank has zero collateral, and in which those making the payments come out ahead if they abandon the house) might reasonably characterize these loans as "troubled." Would the lender write such a loan today?

If loans were written with all the risks included, there's a darn good reason that someone with "negative equity" would pay a higher rate than someone with real equity. The main reason we're in this mess is unsound political policy--it has nothing to do with sound economics.

If the banks/mortgagers aren't being forced to write the new loans, that's better. Better still is to make them write the new loans without any underlying govt guarantees/subsidized rates. That's how we'll find out what the rates should really be for each loan.
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Old 10-24-2011, 01:35 PM   #12
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Originally Posted by MichaelB View Post
These are not troubled loans and nobody is forcing banks to do anything. They are as anxious to refinance underwater mortgages as homeowners. The problem is lending rules don’t allow that in too many cases. All this does is let homeowners with negative equity have the same opportunity to refinance at a lower rate as other homeowners.

Allowing people with positive equity to take advantage of lower rates but denying people with negative equity the same opportunity is not sound economic policy.
That's a good distinction. So if I understand this, it is opening up the rules, so that banks can make the free market decision to allow someone to re-fi, if the bank want to make that offer.

Sounds like this is un-doing a technical restriction. I think that's why I'm OK with this (again, assuming my understanding is close to right). I'd still like to see lenders require 20% down on new purchases - I think that helps protect everyone.

edit/add - just saw samclem's post:

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Originally Posted by samclem View Post
The main reason we're in this mess is unsound political policy--it has nothing to do with sound economics.
No argument from me, but what is done is done. I think this could be a reasonable aid in working our way out of the problems.




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Old 10-24-2011, 01:55 PM   #13
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That's a good distinction. So if I understand this, it is opening up the rules, so that banks can make the free market decision to allow someone to re-fi, if the bank want to make that offer.
Except it's not a free market decision. It would be a free-market decision if the taxpayer's thumb weren't on the scale (subsidizing the low rate for underwater loans via FM guarantees).

If we want to know if any activity is being paid for by taxpayers, a quick guide is to see if the free market would/is already doing the activity without government involvement. If anyone can tell me where I can get a 140% loan-to-value (or more--"no appraisal required"!) private mortgage at 4% APR to buy a house, please let me know.

Another bailout. Great.
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Old 10-24-2011, 02:12 PM   #14
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When I read the article this morning I recalled many threads here on refinancing including one recently where people indicated they would like to refinance and their banks would like to as well but they were restricted from making an offer Ė so the banks suggested missing payments to qualify. Go figure. My first thought was to post here Ė so many interested in refinancing. It never occurred to me that would lead to a discussion with such strong political overtones.

Thatís unfortunate, and also a disservice to members not interested in politics. Please take your political commentary to the FIRE Related Political Topics where it belongs (when related to FIRE).
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Old 10-24-2011, 02:31 PM   #15
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When I read the article this morning I recalled many threads here on refinancing including one recently where people indicated they would like to refinance and their banks would like to as well but they were restricted from making an offer – so the banks suggested missing payments to qualify. Go figure. My first thought was to post here – so many interested in refinancing. It never occurred to me that would lead to a discussion with such strong political overtones.

That’s unfortunate, and also a disservice to members not interested in politics. Please take your political commentary to the FIRE Related Political Topics where it belongs (when related to FIRE).
This is a fine and useful topic, I'm glad you posted it. Many readers will get direct benefit from it. I don't see how exploring its ramifications in full diminishes the subject.
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Old 10-24-2011, 03:31 PM   #16
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I like the idea that only the amount currently owed is refinanced and that's at current, lower interest rates. And the borrower has to be up to date with payments and have a decent credit history. It seems like the borrower will be more likely after the refinancing to continue to make payments and dig him/herself out of the upsidedown situation.
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Old 10-24-2011, 04:01 PM   #17
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Samclem... most mortgages are in some kind of bond... sold to investors... banks do not hold them like they used to...


I wonder if the bond that holds the mortgage is going to hold the new one or if they are going to pay that off and put the refi loan in another bond If they keep it in the old bond, then there is a negative interest rate impact... if they put it in a new bond, then the possibility of default has moved from one bondholder to another... I would think they would have to disclose the info on the number of mortgages that are not covered by equity in the house... or something similar... OR, maybe FM is planning on holding it without selling it to the public....

I guess details to be announced later....


Over all, I would say this is a good program... lowering payments for people who can afford to stay in their house will likely result in fewer forclosure which can only help... and I am one who thinks that nothing the gvmt does will help much until the glut of housing is removed...
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Old 10-24-2011, 04:12 PM   #18
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Originally Posted by MichaelB View Post
When I read the article this morning I recalled many threads here on refinancing including one recently where people indicated they would like to refinance and their banks would like to as well but they were restricted from making an offer – so the banks suggested missing payments to qualify. Go figure. My first thought was to post here – so many interested in refinancing. It never occurred to me that would lead to a discussion with such strong political overtones.

That’s unfortunate, and also a disservice to members not interested in politics. Please take your political commentary to the FIRE Related Political Topics where it belongs (when related to FIRE).
I haven't seen a word on politics in this thread (unless y'all are moderating them out again). I have seen some discussion on whether this is a wise use of taxpayer money, a topic that seems directly related to FIRE and Money. Just because someone doesn't agree with you doesn't make it political. I think it's an excellent conversation, and killing it off won't serve anyone well.
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Old 10-24-2011, 04:37 PM   #19
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This is a fine and useful topic, I'm glad you posted it. Many readers will get direct benefit from it. I don't see how exploring its ramifications in full diminishes the subject.
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I haven't seen a word on politics in this thread (unless y'all are moderating them out again). I have seen some discussion on whether this is a wise use of taxpayer money, a topic that seems directly related to FIRE and Money. Just because someone doesn't agree with you doesn't make it political. I think it's an excellent conversation, and killing it off won't serve anyone well.
+1

I'm confused how a thread about a federal program, involving federal regulators and Freddie and Fannie (The 'F' in each stands for 'Federal') can be discussed without some 'political overtone'? Politics is at the very center of it.

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Old 10-24-2011, 04:41 PM   #20
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Well, I guess the buying votes comment was political, but just because you're talking about a federal (or state or whatever) program doesn't imply the conversation is political. In these forums, political tends to be shorthand for partisan politics, which is unhelpful as well as obnoxious, and should be shut down. But talking about the value of a certain plan and whether it should be implemented is economic, not political. I haven't made my mind up on this one, so hearing from people with various opinions can be helpful and educational. Sometimes people point out viewpoints that I might not have considered on my own.
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