The Sticking Point on GSE Refis: Reps and Warranties


The Obama Administration’s efforts to expand a GSE refinancing program and reach a large number of underwater borrowers will depend on how far the Federal Housing Finance Agency will go in providing lenders relief from loan buy-backs, according to industry officials and analysts watching the effort.

Currently, the White House is working with FHFA to revamp the Home Affordable Refinancing Program, making it more accessible for borrowers with negative equity.

But to get there, lenders will need relief from representations and warranties that entitle Fannie Mae and Freddie Mac to be reimbursed for losses on poorly underwritten loans that default.

Under these ‘reps and warranties’ Fannie and Freddie are currently collecting $1 billion to $2 billion a quarter from lenders.

While the objective of the refinancing effort is aimed at GSE borrowers with negative equity who are still current on their mortgages, lenders will remain reluctant to participate if they are assuming another lender’s buy-back risk. 

Today, servicers only refinance underwater GSE loans that are in their portfolios.  RW relief might encourage other lenders to refinance the servicer’s loans.

Federal Reserve Board governor Elizabeth Duke recently said the risk that Fannie and Freddie will require lenders to buy back the loan and reimburse the GSEs’ for any losses is one of the major “frictions” impeding HARP refinancings. 

“Perhaps competition among potential lenders could be increased if a minimum number of timely payments could be used as a proxy for sound original underwriting to relieve the liability of the refinancing lender,” Duke said at a Fed sponsored housing conference.

Friedman, Billings Ramsey policy analyst Edward Mills said RW relief is “key” to a successful refinancing program that will reach a large number of borrowers with high loan-to-value ratios.

He suggested that RWs could be waived if the borrower has been current on their existing mortgage for a certain period of time. Or it could be on a forward-going basis, where the RWs expire after the borrower complete three years of timely payments on the new loan.

That would provide “some certainty” for lenders to refinance these GSE loans, Mills said.

The HARP program has refinanced over 700,000 borrowers with LTVs greater than 80% and up to 105% since the refinancing program was launched in April 2009.

When it comes to Fannie and Freddie mortgages with LTVs greater than 105% and up to 125%, only 62,400 of those underwater loans have been refinanced so the borrower can take advantage of low mortgage rates and get some payment relief.

The Obama administration wants to expand the HARP and eliminate the 125% LTV cap. Lenders are okay with that – but fear they could be hammered by buybacks if the mortgages eventually go bad.

Negotiations with FHFA over the HARP program have been going on for a few weeks. 

Treasury secretary Timothy Geithner told the Senate Banking Committee Thursday that the White House refi plan should be unveiled in the next couple of weeks.

“I think it can make a big difference,” Geithner said. “And you’re going to see from the FHFA director, maybe in the next couple weeks, very detailed proposals.”

Daily Briefing | Friday, October 7, 2011

  • Another Retail Shoe Drops at B of A: Top Producer Departs

    Bank of America continues to say that it’s committed to retail mortgage lending, but the megabank suffered another blow recently with the departure of one of its top loan producers in the nation, Kevin Budde of Southern California.

  • Although Refis are Picking Up, Mortgage Jobs Lag

    Mortgage companies continued to pare back their payrolls in August as lenders cut 2,800 full-time employees during the month, following 1,900 layoffs in July.

  • FHA May Allow Investors to Use 203(k) Program

    As the Obama Administration examines options to expedite the sale of foreclosed properties, the Federal Housing Administration is weighing a tweak to its 203(k) program, opening it once again to investors.

  • Dems Demand More Relief for Underwater Borrowers

    The GSE regulator told House Democrats at a closed door meeting that the Federal Housing Finance Agency is committed to making meaningful changes to a special program that will allow more borrowers with high LTV loans to refinance at lower mortgage rates.

  • Helios, CRE Special Servicer, Acquires Situs

    Helios AMC, a commercial real estate special servicer which is sponsored by Ranieri Partners, has acquired real estate advisory firm The Situs Companies. The combined entity will retain the Situs name. The purchase price was not disclosed.

  • Fitch: CMBS Delinquencies Drop Again

    Fitch Ratings found delinquencies on loans underlying commercial mortgage-backed securities declined for the second month in a row in September as its numbers bore out what the company has identified as a trend toward improvement in the hotel sector.

  • Due Diligence Provider Gets Rating Agency Approval

    Credit rating agency DBRS this week approved American Mortgage Consultants, New York, as a third-party due diligence provider for residential MBS.

  • Prepayment Reports Show Surge in Speeds

    Analysts found prepayments surged notably in September.

  • Massachusetts Preparing to Sue Servicers Over Foreclosures

    Fearing that the megabanks might get off too easy in the multi-state mortgage settlement talks, Massachusetts Attorney General Martha Coakley is preparing to file lawsuits against the nation’s largest servicers for wrongfully foreclosing on customers.

Leave a Reply