With the Federal Housing Finance Agency's (FHFA) retooling of the Home Affordable Refinance Program (HARP), one change in particular may hold the answer to just how much of an impact the initiative will have Ã¢â‚¬" FHFA's decision to waive certain representations and warranties on loans refinanced through the program.
The debate has already begun about whether such a move will indeed persuade lenders to utilize the program more freely.
Generally when a mortgage is refinanced, any representations and warranties that are attached to the original loan Ã¢â‚¬" such as assurance of a clean title Ã¢â‚¬" are carried over to the originator of the new refinanced loan. The new lender can be held responsible by the investor Ã¢â‚¬" in this case, Fannie Mae and Freddie Mac Ã¢â‚¬" and be forced to buy back the loan as a result of an earlier defect overlooked by the original lender.
Essentially, defects can be transferred from lender to lender. Market players and government officials alike say this aspect of the refinance process has hindered the reach of HARP.
FHFA's waiver eliminates the repurchase exposure associated with the intent of reps and warranties for loans refinanced through the federal program.
While reps and warranties protect Fannie and Freddie from losses on defective loans, FHFA's decision to forego such protection is grounded in the idea that loans that qualify for HARP pose less of a risk.
To be considered for a HARP refinancing, the mortgage must have been originally sold to the GSEs on or before May 31, 2009. According to FHFA, defects that trigger reps and warranties typically show up in the first few years of a mortgage.
HARP also requires the borrower to be current at the time of the refinance, with no late payment in the past six months and no more than one late payment in the past 12 months.
FHFA explains that nearly all HARP-eligible borrowers have been paying their mortgages for more than three years, and most for four or more years. The federal agency says these are ""seasoned loans made to borrowers who have demonstrated a capacity and commitment to make good on their mortgage obligation through a period of
severe economic stress and house price declines,"" which makes them a safe bet.
""Therefore, FHFA has concluded that eliminating the reps and warrants that may have discouraged industry participants from taking greater advantage of HARP to-date will be good for borrowers, housing markets, and the enterprises and taxpayers,"" the agency said in a statement.
Gene Sperling, director of the White HouseÃ¢â‚¬â„¢s National Economic Council, told reporters during a phone briefing that FHFAÃ¢â‚¬â„¢s elimination of rep and warranty stipulations will Ã¢â‚¬Å“unleash competition for housing refinance.Ã¢â‚¬Â
Without the added risk of pre-existing underwriting deficiencies, officials believe lenders will be more aggressive in putting borrowers into new loans under the HARP initiative.
Homeowners who are current on their payments but have been unable to refinance because of a severe negative equity position may soon find themselves being pursued by a host of lenders with a HARP application in hand. Some mortgage lenders do see it as an opportunity.
_American Banker_ cites comments made to investors by Matthew Jozoff, a managing director for JPMorgan Chase, in which he explained, ""So if a [Bank of America] borrower has been current for six months, basically a Chase originator could go after that borrower, refinance them, and not be held to the original loan file that BofA had. Consequently, we think that does increase the willingness of cross-servicing refinancing to take place.""
The analysts at Barclays Capital, however, say the Ã¢â‚¬Å“rep and warranty waiver may be less effective than initially estimated.Ã¢â‚¬Â
In a research note released Tuesday, they concede that rep and warranty issues are widely thought to be one of the main points of friction in refinancing HARP-eligible borrowers.
Ã¢â‚¬Å“The new HARP announcement held some promise of relief on this issue, and initial reports seemed to suggest a significant waiver in claims,Ã¢â‚¬Â Barclays said, but the investment bank points out that Fannie Mae already provides rep and warranty relief on the old loan for same-servicer underwriting through its Refi Plus program.
Essentially, the new HARP announcement simply extends this feature to Freddie Mac and potentially to refis by a different servicer, according to Barclays. But the companyÃ¢â‚¬â„¢s analysts note that Ã¢â‚¬Å“the presence of this waiver has not caused Fannie Mae speeds to be dramatically higher than Freddie Mac's historically.Ã¢â‚¬Â
While the program revisions could increase loan refi prepayments on the margin, the company's analysts say Ã¢â‚¬Å“it is difficult to envision the proposals - as they stand - triggering a significant rep and warranty waiver related refinancing wave.Ã¢â‚¬Â
Barclays also notes that the waiver may potentially only be provided in exchange for a fee.