NHLA Blog

With mortgage rates heading to all-time lows, many homeowners may be considering refinancing their homes.

Refinancing can be a great option for many homeowners, and the numbers certainly can be appealing.

If you have a $165,000 mortgage, you could save hundreds of dollars per month.

In the following scenario, the difference in a 7 percent interest rate on a mortgage and a 5 percent mortgage over the course of 30 years can mean hefty savings.

1. How much can you save?

This is good news for the mortgage/housing market and consumers.  More liquidity and competition means better products, services, and pricing (see two articles below):

The regulator of Fannie Mae and Freddie Mac is considering giving the government-backed mortgage companies another role: helping to finance small mortgage banks.

A spokeswoman for the regulator, the Federal Housing Finance Agency, said it is looking at ways that the two companies might help revive the market for so-called warehouse loans, which are loans made to mortgage banks. This possible role for Fannie and Freddie is the latest sign of how they are being used increasingly as instruments of government policy rather than corporations focused on shareholder returns.

John Courson, head of the Mortgage Bankers Association,wants Fannie and Freddie to help small lenders. Demand for mortgages is surging as low interest rates prompt millions of Americans to refinance. New U.S. first-lien home-mortgage loans granted this year will surge to $2.78 trillion, up 72% from 2008's depressed level, the Mortgage Bankers Association predicts. But mortgage banks have been hobbled in recent months by a dearth of credit, making it hard for them to respond to that demand.

Partly as a result of this credit crunch, giant full-service banks like Bank of America Corp. and Wells Fargo & Co., which don't need warehouse funding, are increasing their dominance of the mortgage market. Consumers will face higher interest rates and slower service if mortgage banks can't get enough credit to compete with the giants, mortgage bankers argue.

The regulator has asked representatives of mortgage banks, including the Mortgage Bankers Association, to come up with a detailed plan for Fannie and Freddie to help mortgage banks get credit. John Courson, chief executive officer of the association, said in an interview that the plan should be ready to be presented to the regulator within about a week.

One possibility is that Fannie and Freddie will guarantee debt issued by warehouse lenders, making it easier for them to provide financing to mortgage banks. When mortgage bankers complained about the lack of warehouse funding, officials in the Treasury and Federal Reserve urged them to seek help from the regulator of Fannie and Freddie. Last September, the regulator took over management control of the two shareholder-owned companies as surging defaults depleted their thin layers of capital. They are now being propped up by funds from the Treasury. Under regulatory control, they have shifted their focus to the prevention of foreclosures, even though that may delay their return to profitability. The Treasury also has said that Fannie and Freddie may play a role in supporting state housing-finance agencies.

Mortgage banks typically are small, family-owned companies. Unlike commercial banks or thrifts, they aren't licensed to take deposits and so don't have that source of money for their loans. Instead, they borrow money from warehouse lenders, which often are units of larger banking companies. The mortgage banks use the short-term credit to provide loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to investors such as Fannie or Freddie.
Until credit markets froze up in 2007, Wall Street investment banks and many large mortgage lenders were eager to provide these warehouse lines of credit. Now, many of those big institutions have stopped making warehouse loans or have cut back on that business. Warehouse Lending Project, a group of mortgage bankers seeking to revive the market, estimates overall money available for warehouse loans has dropped nearly 90% since 2006, to about $25 billion.

Mr. Courson said he believes the regulator can give Fannie and Freddie temporary authority to help fund warehouse loans and that it won't be necessary to seek congressional approval for this expansion of the two companies' role. "We just don't have the luxury of time for going through the legislative meat grinder," he said.

MBA Formally Asks for Capital Cut on Warehouse Lines

The Mortgage Bankers Association has asked federal banking regulators to cut the capital requirement on warehouse lines of credit by as much as 80% to alleviate a funding crisis facing non-depositories. Currently, depending on what stage of funding a loan is in, the risk weighting on a warehouse loan can be as high as 100%. This means $8 in capital must be held for every $100 in warehouse credit outstanding.

For Fannie Mae, Freddie Mae, Federal Housing Administration and Veterans Affairs loans the trade group wants the capital charge to be 20%. Non-bank mortgage lenders are seeing their lines disappear or reduced with several regional banks exiting the warehouse sector as a way to preserve capital. MBA's letter was sent to the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision.

Homeowners are learning more about who is eligible for the government's new Home Affordable Refinance program.

Officially announced March 4, the refinance effort is one part of the similarly named $275 billion Making Home Affordable program, which is intended to help up to 9 million struggling borrowers stay in their homes.

Early details about the refinancing program were relatively scant. Initially it was reported that eligibility would be restricted to:

· Owner-occupied primary residences.

· Conforming loans owned or securitized by Fannie Mae and Freddie Mac.

· Homeowners current on their mortgages.

· Mortgages that don't exceed 105 percent of the property's current market value.

Fannie and Freddie recently released comprehensive policy guidelines to lenders and servicers. As a result, a more complete picture of the program is beginning to emerge.

The biggest surprise involves a shift in which property types qualify. Fannie and Freddie now say owners of second homes and small investment properties also can refinance.

Brad German, senior director of public relations at Freddie Mac, says the reason for expanding coverage beyond primary residences is "pretty straightforward -- (to) help stabilize neighborhoods and housing markets by reducing the number of foreclosures."

Homeowners with poor credit also get a big break from the announced rules. In most cases, no minimum credit score is required to refinance.

Other important areas of agreement between Fannie and Freddie include:

Private mortgage insurance. Homeowners who already have PMI must maintain their present level of coverage on the new loan. However, borrowers who do not have mortgage insurance on their current loan do not have to carry insurance on the new loan, even if the mortgage has a loan-to-value ratio of more than 80 percent.

Second mortgages. Second mortgages will not prevent borrowers from refinancing so long as creditors agree to resubordinate the secondary liens.

Despite these similarities, there are also some key differences in what the two companies are offering, as Bankrate's Holden Lewis has reported.

In a nutshell, homeowners with Fannie loans can choose from a greater range of lenders than borrowers with Freddie loans, who are restricted to negotiating a new rate with their current lender or servicer.

On the other hand, Freddie will charge a maximum fee of 0.25 percent of the overall loan balance, much lower than the up to 3 percent that Fannie will charge riskier borrowers.

Lenders are expected to begin issuing new loans under Home Affordable Refinance early April. Early signs indicate that homeowners may be responding to the government's overtures.

For example, the Homeownership Preservation Foundation, a Minneapolis-based nonprofit that works with homeowners to prevent foreclosure, recently said an average of 13,500 borrowers have called each day inquiring about help since President Barack Obama's March 4 announcement, a three-fold increase over earlier call volumes.

Dan Green, a Cincinnati-based certified mortgage planner and author of TheMortgageReports.com, expects that trend to grow in coming weeks.

"There's been a direct correlation between media coverage and the number of homeowner inquiries," Green says. "I expect interest to resurface in early April."

Green is hopeful that Home Affordable Refinance will pay dividends for individual homeowners and the limping American economy.

"Lower payments are good for households and good for the economy," Green says. "If just one additional family gets access to today's low mortgages rates, the program is a success."

Source: Bankrate.com, 3/24/09