By Kenneth R. Harney
Saturday, March 14, 2009
Fannie Mae and Freddie Mac have published the rules governing their upcoming mass refinancing campaigns, and they're more favorable for borrowers than indicated at first by the White House and Treasury, especially for owners of second homes and small investment properties.
Although initial reports suggested that the refinancing would be for owner-occupied primary residences, the guidelines sent to lenders this month by Fannie and Freddie say second homes and small rental properties are eligible, provided that their mortgages already are in the companies' portfolios or securitizations and have been paid on time.
Brad German, a spokesman for Freddie Mac, said second homes and investment properties with one to four units are important because they may "help stabilize neighborhoods and housing markets." Refinancing investor-owned rental units, he added, can "help reduce renter evictions by putting landlords in a [more affordable] refi that improves their chance of success."
Under the administration's programs, an estimated 4 million to 5 million owners whose mortgages are held by Fannie and Freddie will be eligible for refinancing to lower rates even though they would normally not qualify because of declines in property value. Applications are being taken by participating lenders now, although no loans are scheduled for funding by Fannie or Freddie until early April.
To illustrate how refinancing might work: Say you bought a house several years ago for $400,000 with a $350,000 first mortgage at 6.5 percent. Because of local property devaluation, your house is now worth roughly the amount of your loan balance, making it impossible to refinance into today's rates in the low 5 percent range.
The new programs would allow you to refinance, provided you have a solid repayment record, your loan balance exceeds your property value by no more than 5 percent, and your loan is either owned outright or contained in a mortgage bond guaranteed by either corporation.
To make their programs as widely accessible as possible, Fannie and Freddie's instructions offer a variety of concessions. On top of the list are credit scores. Both companies plan to waive their usual minimum borrower credit score requirements for most applicants. Participating lenders will still pull your scores and credit files, but generally there's no specific cutoff point below which you'll be rejected.
Equally important for some highly leveraged homeowners, the companies are setting no limits on the amounts of existing second mortgages or home-equity-line balances, as long as the secondary loan creditors agree to re-subordinate their liens behind the new Fannie- or Freddie-funded mortgage.
Both companies also are suspending their standard rules requiring purchase of private mortgage insurance coverage when borrowers' equity stakes are less than 20 percent. If loans carried mortgage insurance coverage when Fannie or Freddie first acquired them, that coverage will remain in force. But borrowers who never had insurance, and now have depressed equity stakes below 20 percent, will not be required to purchase new coverage.
Fannie and Freddie also plan to lessen the burden of other typical costs in connection with the mass refinancings, including appraisals, lender fees and closing expenses. Fannie will permit borrowers to finance those fees entirely by rolling them into the replacement loan amount. Freddie will allow financing of escrow fees, prepaid items and closing charges up to a limit of $2,500.
Both companies emphasize that their refinancings will be limited strictly to customers who have paid their mortgages on time -- people who haven't been late by 30 days or during the most recent 12 months.
One major area of difference between Fannie and Freddie involves where you obtain your new replacement loan. Freddie requires borrowers to apply to their existing lender or servicer for rate quotes and terms. Fannie, by contrast, allows borrowers to contact any of its 30,000 approved servicing and lending partners nationwide for quotes.
Fannie spokesman Brian Faith said "being able to shop their refi business can help [borrowers] reduce rates and terms." Freddie Mac's German said his company is keeping refis with the current lender or servicer because that will cut down on time and costs -- "a simpler process with no re-underwriting for most borrowers." The current servicer has the detailed files on the existing mortgage, knows the customers, and is in the best position to offer a fast and less expensive refi.
How do you know if you're one of the millions of homeowners who might be eligible? First, you need to find out if your mortgage is owned or guaranteed by Fannie or Freddie. Your current servicer can tell you, or you can visit the companies' special Web sites: http://www.fanniemae.com/homeaffordable or http://www.freddiemac.com/avoidforeclosure.
Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.