Fannie Mae has updated its Selling Guide to reflect the recently announced changes to the Home Affordable Refinance Program (HARP).
Most of the revisions had been previously announced in November, but there's one nuance that stands out, and until this week, had been absent the HARP 2.0 discussion.
Fannie Mae has removed the ""reasonable ability to repay"" clause from the criteria for vetting borrowers for a new HARP 2.0 refinance.
The D.C.-based GSE says the terminology was scratched because the underwriting requirements specific to its refinance channels Ã¢â‚¬" Refi Plus and DU Refi Plus Ã¢â‚¬" are already clearly outlined within the Selling Guide.
Fannie states in its latest update, ""For Refi Plus, the lender is no longer required to determine the borrower has a reasonable ability to repay the mortgage based on a review of the information provided on the new loan application.""
The previous guidelines for HARP loans processed through the manual underwriting channel (Refi Plus) put the onus on lenders to determine that the borrower had a reasonable ability to repay the mortgage based on information provided by the borrower and payment history. It also required that lenders verify and ensure the borrower had a source of income.
Barclays Capital explains that ability to pay has traditionally been measured using DTI (debt-to-income
ratio) but pursuant to HARP guidelines, no DTI calculation or evaluation is required if the borrower's payment does not increase by more than 20 percent. A 45 DTI cap applies otherwise.
Under the revised guidelines, the 'borrower ability to pay' clause is no longer an underwriting requirement. Barclays says it appears Fannie Mae has taken subsequent feedback from lenders into account since the November 15th announcement of the HARP 2.0 framework and incorporated this change into its guidelines.
The analysts at Barclays say the removal of the ability to pay clause is a ""significant and unanticipated change that could have ramifications for the HARP program.""
The GSEs promised to relax representation and warranty requirements under the new HARP program and in doing so, have reduced or waived most of the underwriting requirements on traditional loans.
The ability to pay guideline, however, has continued to burden lenders with a subjective underwriting evaluation process that contains rep and warranty risk, according to Barclays.
Ã¢â‚¬Å“In our conversation with lenders, this has been often highlighted as one of the significant hurdles to HARP refinancing,Ã¢â‚¬Â the investment banking firm said. Ã¢â‚¬Å“Lenders argue that lack of clarity on what 'reasonable ability' precisely means could expose lenders to indemnification liability in the event that the loan defaults.Ã¢â‚¬Â
Barclays went on to explain, Ã¢â‚¬Å“Though the GSEs have indicated that this clause exists to ensure prudent underwriting judgment and efficient choice between HARP and HAMP, lenders view this as a significant risk.Ã¢â‚¬Â
Removal of the clause alleviates many of the remaining concerns about rep and warranty indemnification with respect to HARP refis, according to Barclays.
The firm says lenders can now underwrite HARP loans assessing borrower credit based on a straightforward metric - number of payments made Ã¢â‚¬" which reduces a significant layer of complexity with respect to rep and warranties liabilities for HARP loans.