Freddie Mac early this week will ease its mortgage underwriting formulas to boost the number of homeowners who qualify for the government’s home loan refinancing program.
Participating lenders have complained that approval of Fannie Mae-backed loans for the Home Affordable Refinance Program far outpaces those for Freddie Mac. It is one, but certainly not the only, criticism of the program.
Changes made last year to the government-backed mortgage refinancing program and fully implemented in mid-March were supposed to make it easier for homeowners who are current on their mortgages to refinance and secure a lower interest rate, even if they owed more on their mortgages than their homes were worth.
The reformatted program, commonly known as HARP 2.0, opened eligibility to homeowners who owe more than 25 percent more on their mortgage than the value of their homes. Other changes were designed to spur competition for these homeowners among lenders, making it easier for consumers to shop for the best mortgage interest rate.
Early results show the program still may do little to help borrowers who are so far underwater on their mortgages that they think the only option is to walk away, a measure that has come to be known as a strategic default.
HARP mortgage originations rose almost 93 percent from 2011’s fourth quarter to this year’s first quarter, to 180,572 loans. However, only 21 percent of them involved mortgages where the borrower was underwater by more than 5 percent, according to an analysis by trade publication Inside Mortgage Finance.
In response to complaints from lenders, Freddie Mac this week will undertake a “fine-tuning” of its underwriting process, according to Freddie Mac spokesman Brad German. Specifics of how the automated underwriting models will be altered aren’t being disclosed, even to lenders, but some homeowners who have been turned down for the program may now qualify, he said.
“It will be a noticeable, positive change for the homeowner,” German said. “It will help increase the number of borrowers who can refinance under HARP and take advantage of today’s rates.”
Other issues remain, however.
The nation’s largest servicers say they are seeing overwhelming demand — Bank of America alone has received 30,000 applications in the past three months — but most have limited the program to existing customers. Noncustomers, if they are able to apply, face more stringent requirements.
“It’s virtually all coming from the largest lenders,” said Guy Cecala, Inside Mortgage Finance’s CEO and publisher. “The good news is the volume is up. The bad news is the two biggest issues they were trying to address were increasing or adding competition and grabbing more high (loan-to-value) loans. And neither of those have succeeded.”
Bridgeview Bank Mortgage Co. is fielding 15 to 20 calls a day from consumers interested in the program, and of the 100 or so who have submitted applications, just one is headed toward approval. Consumers “are so frustrated, they are so angry,” said Christine Leyden, an executive vice president.
A customer at Devon Bank in Chicago looked great on paper, and seemed the perfect candidate for a program that could drop his mortgage rate from 5.75 percent to 4.125 percent. But because the customer had already started the application process elsewhere, there were inquiries on his credit profile and the automated underwriting process gave the application a “caution” rating, meaning that the bank could ultimately be forced to hold the loan in its own portfolio. In the current environment, banks hold almost no mortgages on their books that aren’t jumbo loans.
“We were just dumbfounded” by the caution rating, said John Stephenson, bank senior vice president.
During the fourth quarter of 2011, 22.8 percent of homeowners nationally and 21.7 percent in Illinois were upside down on their mortgages, according to housing data provider CoreLogic.
To be eligible for the refinancing program, the mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009, and the mortgage must carry a loan-to-value ratio above 80 percent. In addition, borrowers must be current on their loans and have had no late payments in the past six months and not more than one late payment in the past 12 months.
Freddie Mac’s German suggested that borrowers with Freddie Mac-backed mortgages who have been rejected for HARP may want to wait a few weeks before possibly reapplying for the program.
Freddie Mac Updates LP For HARP Loans