DU Version 9.0 Update
During the weekend of October 20th, Fannie will be upgrading DU to version 9.0.
DU Approval Changes
Version 9.0 is entirely removing the Expanded Approval recommendations for all loan types except DU Refi Plus. An update to the DU credit risk assessment is expected to result a greater number of Du Refi Plus loans receiving an Approve recommendation.
Appraisal Documentation Requirements
Version 9.0 will no longer be offering appraisal/inspection types 2055, 2075, 1075 and 2095. DU will only be recommending full appraisal types. However, there will still be casefiles which receive the property fieldwork waiver option.
A minimum of 6 months reserves will now be required for all 2-4 unit principal residence transactions. This will not apply for DU Refi Plus loans.
As the result of a logic update, a fewer number of disputed tradeline messages will be issued. Tradelines not indicated as disputed by DU do not require additional investigation. However, payment on the tradeline must be included in the expense ratio if the account does belong to the borrower.
The following chart represents the minimum employment documentation required by DU Version 9.0:
DU Refi Plus Documentation
Base Pay (salary or hourly)
Paystub + W-2 covering most recent year
Bonus, Overtime, and Commission < 25%
Paystub + W-2s covering most recent two-year period
Commission ≥ 25%
Paystub, W-2s, and personal tax returns covering most recent two-year period
Personal tax return covering most recent year
Personal and business tax returns covering most recent two-year period
Second Job, not self-employed
Second Job, self-employed
UPDATE (January 24, 2012) :
The US government (FNMA and FreddieMac) announced changes to the HARP program November 15, 2011, now called HARP-2. This post is accurate and up-to-date. Click here to get a HARP-2 refinance rate quote.
If you're underwater on your conforming, conventional mortgage, you may be eligible to refinance without paying down principal and without having to pay mortgage insurance, ther is No LTV% Limit for HARP-2 Refinances.
Below are the details for the government's new HARP-2 refinance program which will become available sometime in late February - March 2012.
Don't Wait ... Get a HARP refi quote now.
What Is HARP?
HARP was started in April 2009. It goes by several names. The government calls it HARP, as in Home Affordable Refinance Program.
The program is also known as the Making Home Affordable plan, the Obama Refi plan, DU Refi +, and Relief Refinance.
In order to be eligible for the HARP refinance program :
1. Your loan must be backed by Fannie Mae or Freddie Mac.
2. Your current mortgage must have a securitization date prior to June 1, 2009
If you meet these two criteria, you may be HARP-eligible. If your mortgage is a VA, FHA, USDA insured loan you are not HARP-eligible but there are other specific refinance programs available. If you have a jumbo mortgage above $417,000 you are not HARP-eligible.
What Is HARP-2?
HARP-2 is the trade name for the recent changes and ammendment to the underlying HARP program, which will now make it possible for severely underwater homeowners in Florida and other states to refinace to a lower rate mortgage. There will be no LTV% limits, a new appraisal will not be required, and the borrower does not even have to be employed, so long as the existing mortgage is current and up-to- date.
HARP : Questions and Answers
Do these question-and-answers account for the "new" HARP-2 mortgage program?
Yes, everything you are reading is accurate as of today, January 24, 2012. This post includes the latest changes as rolled out by the Federal Home Finance Agency on October 24, 2011, and as confirmed by Fannie Mae and Freddie Mac on November 15, 2011.
Is "HARP" the same thing as the government's "Making Home Affordable" program?
Yes, the names HARP and Making Home Affordable are interchangeable.
How do I know if Fannie Mae or Freddie Mac has my mortgage?
Fannie Mae and Freddie Mac have "lookup" forms on their respective websites. Check Fannie Mae's first because Fannie Mae's market share is larger. If no match is found, then check Freddie Mac. Your loan must appear on one of these two sites to be eligible for HARP. It does not matter what bank or lender currently collects your loan payments, or who or where you got your mortgage from, FannieMae and FreddieMac purchase all types of loan and it is very likely either one or the other is the actual end-owner own your loan today.
If my mortgage is held by Fannie Mae or Freddie Mac, am I instantly-eligible for the Home Affordable Refinance Program?
No. There is a series of criteria. Having your mortgage held by Fannie or Freddie is just a pre-qualifier.
My mortgage is held by Fannie/Freddie. Now what do I do?
Find a recent mortgage statement and write "Fannie Mae" or "Freddie Mac" on it -- whichever group backs your home loan -- so you don't forget. Give that information to your lender when you apply for your HARP refinance.
What if neither Fannie Mae nor Freddie Mac has a record of my mortgage?
If neither Fannie nor Freddie has record of your mortgage, your loan is HARP-ineligible. However, you may still be eligible for a "regular" refinance to lower rates. Use this form to get a rate quote to see your options. Or, if your mortgage is insured by the FHA, use the FHA Streamline Refinance program. The FHA Streamline Refinance helps underwater homeowners, too.
Does HARP work the same with Fannie Mae as with Freddie Mac?
Yes, for the most part, the HARP mortgage program is the same with Fannie Mae as with Freddie Mac. There are some small differences, but they affect just a tiny, tiny portion of the general population. For everyone else, the guidelines work the same.
Am I eligible for the Home Affordable Refinance Program if I'm behind on my mortgage?
No. You must be current on your mortgage to refinance via HARP.
Will the Home Affordable Refinance Program help me avoid foreclosure?
No. The Home Affordable Refinance Program is not designed to delay, or stop, foreclosures. It's meant to give homeowners who are current on their mortgages, and who have lost home equity, a chance to refinance at today's low mortgage rates.
What are the minimum requirements to be HARP-eligible?
First, your home loan must be paid on-time for the prior 6 months, and at least 11 of the most recent 12 months. Second, your mortgage must have been sold to Fannie or Freddie prior to June 1, 2009. And, third, you may not have used the HARP mortgage program before -- only one HARP refinance per mortgage is allowed.
If I refinanced with HARP a few years ago, can I use it again for HARP II?
No. You can only use the HARP mortgage program one time per home.
Is there a loan-to-value restriction for HARP?
No. All homes -- regardless of how far underwater they are -- are eligible for the HARP program. Click here for a HARP rate quote.
I am really far underwater on my mortgage. Can I use HARP?
Yes, you can. There is no loan-to-value restriction under the HARP mortgage program so long as your new mortgage is a fixed rate loan with a term of 30 years or fewer. If you use an adjustable-rate mortgage, your loan-to-value is capped at 105%.
Maybe I wasn't clear. I am really, really far underwater on my mortgage. Are you sure I can use HARP?
Yes, I am sure. The new HARP mortgage program specifically has no loan-to-value restriction so that homeowners in Florida, California, Arizona and Nevada can take advantage of it. You can 300% loan-to-value, and still be HARP-eligible. HARP is now unlimited LTV for fixed rate loans with 30-year terms or less.
If I refinance with HARP using an ARM, do I still get "unlimited LTV"?
No, if you use an ARM for HARP, you are limited to 105% loan-to-value. Only fixed rate loans get the unlimited LTV treatment.
Will my home require an appraisal with the HARP mortgage program?
Sort of. Although your home's value doesn't matter for the HARP mortgage program, lenders will run what's called an "automated valuation model" (AVM) on your home. If the value meets reliability standards, no physical appraisal will be required. However, your lender may choose to commission a physical appraisal anyway -- just to make sure your home is "standing".
Is HARP the same thing as an FHA Streamline Refinance?
No, the HARP mortgage program is administered through Fannie Mae and Freddie Mac. FHA Streamline Refinances are performed through the FHA. The programs have similarities, however.
Does Ginnie Mae participate in the HARP Refinance program?
No, Ginnie Mae does not participate in the HARP Refinance program. Ginnie Mae is associated with FHA mortgages -- not conventional ones. HARP II is for conventional mortgages only.
Do I have to HARP refinance with my current mortgage lender?
No, you can do a HARP refinance with any participating mortgage lender.
So, I can use any mortgage lender for my HARP Refinance?
Yes. With the Home Affordable Refinance Program, you can refinance with any participating HARP lender. Click here for a HARP rate quote.
My current bank says that they're the only ones who can do my HARP Refinance. Is that true?
No, that's not true. Or, at least it shouldn't be. There are very few instances in which a HARP applicant will be precluded from shopping for the best rate. It's doubtful that your situation is one of them.
My current mortgage is with [YOUR BANK HERE] and I don't like them. Can I work with another bank?
Yes, with HARP, you can work with any participating lender in the country. Click here for a HARP rate quote.
I put down 20% when I bought my home. My home is now underwater. If I refinance with HARP, will I have to pay mortgage insurance now?
No, you won't need to pay mortgage insurance. If your current loan doesn't require PMI, your new loan won't require it, either.
I pay PMI now. Will my PMI payments go up with a new HARP refinance?
No, your private mortgage insurance payments will not increase. However, the "transfer" of your mortgage insurance policy may require an extra step. Remind your lender that you're paying PMI to help the refinance process move more smoothly.
My current mortgage has Lender-Paid Mortgage Insurance (LPMI). Can I refinance via HARP?
No. If your mortgage has lender-paid mortgage insurance (LPMI), you are HARP-ineligible.
How do I know if my mortgage has Lender-Paid Mortgage Insurance (LPMI)?
To find out if your mortgage has lender-paid mortgage insurance (LPMI), locate your loan paperwork from closing. There should be a clear disclosure that states that your mortgage features LPMI, and the terms should be clearly labeled for you.
I don't see an LPMI disclosure in my closing package but I think that I have it. How do I know if my mortgage has LPMI?
If there is no LPMI disclosure, first check if your first mortgage's loan-to-value exceeded 80% at the time of closing. If it did, look to see if you are paying monthly mortgage insurance. If you are not paying monthly PMI, you're likely carrying LPMI (and are HARP-ineligible).
What's the biggest mortgage I can get with a HARP refinance?
HARP refinances are limited to your area's conforming loan limits. In most cities, the conforming loan limit is $417,000. However, there are some cities in which conforming loan limits are as high at $625,500.
Can I do a cash-out refinances with HARP?
No, the HARP mortgage program doesn't allow cash out refinance. Only rate-and-term refinances are allowable.
Can I refinance a second/vacation home with HARP?
Yes, you can refinance an second/vacation property with HARP, even if the home was once your primary residence. The loan must meet typical program eligibility standards.
Can I refinance an investment/rental property with HARP?
Yes, you can refinance an investment/rental property with HARP, even if the home was once your primary residence. You can refinance a home on which you're an "accidental landlord" via HARP. The loan must meet typical program eligibility standards.
I rent out my old home. Is it HARP-eligible even though it's an investment property now?
Yes, you can use the HARP Refinance program for your former residence -- even if there's a renter there now.
These things I'm reading here... Why, when I call my bank, do they tell me it's not true?
It's possible that the call center representative to whom you're speaking is neither knowledgeable about HARP, nor the actual mortgage underwriting process. This post is researched and cross-referenced against Fannie Mae and Freddie Mac guidelines, and publicly-available reports from the FHFA.
Are condominiums eligible for HARP refinancing?
Yes, condominiums can be financed on the HARP refinance program. Warrantability standards still apply.
Can I consolidate mortgages with a HARP refinance?
No, you cannot consolidate multiple mortgages with the HARP refinance program. It's for first liens only. All subordinate/junior liens must be resubordinated to the new first mortgage.
Can I "roll up" my closing costs with a HARP refinance?
Yes, mortgage balances can be increased to cover closing costs in addition to other monies due at closing such as escrow reserves, accrued daily interest, and a small amount of cash. In no cases may loan sizes exceed the local conforming loan limits, however.
I am unemployed and without income. Am I HARP-eligible?
Yes, you do not need to be employed to use the HARP mortgage program. HARP applicants do not need to be "requalified" unless their new principal + interest payment increases by more than 20%. If the new payment increases by less than 20%, or falls, there is no requalification necessary.
My original mortgage was a stated income loan. Will my income be verified with a HARP refinance?
No, your income will not be verified via the HARP refinance program unless your new principal + interest payment increases by more than 20 percent. If your new principal + interest payment increases by less than 20%, or falls, there is no income verification necessary.
I am now divorced. I want to remove my ex-spouse from the mortgage. Can I do that with HARP?
Yes. With HARP, a borrower on the mortgage can be removed via a HARP refinance so long as that person is also removed from the deed; and has no ownership interest in the home. Click here for a HARP rate quote.
What are the HARP program's mortgage rates?
Mortgage rates for the HARP mortgage program are the same as for a "traditional" refinance. There is no "premium" for using the HARP program.
Do HARP refinances use Loan-Level Pricing Adjustments (LLPAs)?
Yes, HARP mortgages use ‘loan-level pricing adjustments’, but LLPAs are dramatically reduced on a HARP refinance and, in some cases, waived entirely. For most loans, loan-level pricing adjustments are capped at 0.75 points, and there are no LLPAs for fixed-rare HARP refinances with terms of 20 years or fewer, such as for a 15 year loan. But there are exceptions, such as for loans below 80% LTV where the LLPs’s are 2.0 points, in an attempt to discourage those who do not need the HARP from overloading it, however unlike ‘traditional’ refinance loans all applicants under HARP do not need to prove income or employment to re-qualify so even at low LTV% HARP makes it possible for even unemployed borrowers to refinance.
Does a HARP Refinances require LLPAs for a 15-year fixed rate mortgage?
No, there are no LLPAs for 15-year fixed rate mortgage via the HARP Refinance program.
Is there a minimum credit score to use the HARP program?
No, there is no minimum credit score requirement with the HARP mortgage program, per se. However, you must qualify for the mortgage based on traditional underwriting standards.
Do I have to refinance my mortgage with my current lender?
In most cases, no. You can do a HARP refinance with any lender you want. Click here for a HARP rate quote.
What does the term "DU Refi Plus" mean?
"DU Refi Plus" is the brand name Fannie Mae assigned to its particular flavor of the HARP mortgage program. "DU" stands for Desktop Underwriter. It's a software program that simulates mortgage underwriting. "Refi Plus" is a gimmicky-sounding term that could have been anything. The name has been trademarked, however.
What does the term "Relief Refinance" mean?
"Relief Refinance" is the Freddie Mac equivalent of DU Refi+.
For how long should I lock my mortgage rate via the HARP Program
Lock for 45 days, at minimum. This is because the HARP mortgage program, while streamlined for simplicity, still has some grey areas that can lead to delay. It's better to have a rate lock that lasts too long than not long enough.
When does the HARP program end?
If you are HARP-eligible, you must close on your mortgage prior to January 1, 2014.
The IRS will likely start taking a closer look at mortgage interest deductions and payments in an effort to identify tax cheats who are underreporting their income or not filing at all.
A new government audit found that large numbers of homeowners are paying significant amounts of mortgage interest but who are either not filing tax returns or whose returns indicate they do not have enough income to cover their mortgage payments and meet basic living expenses. The audit, by a U.S. Treasury inspector general, recommends making greater use of data reported on mortgage interest statements to identify and catch tax cheats.
The report focuses on data reported for IRS Form 1098, which is the form taxpayers use to report their mortgage interest payments for use in preparing their tax returns. Mortgage lenders and servicers keep track of borrower's mortgage principal and interest payments throughout the year and report the data to both individual taxpayers and the IRS using Form 1098.
A random sampling of homeowners whose Form 1098 reports indicated they had paid at least $20,000 in mortgage interest in 2005 concluded that a full review of all such filers would yield approximately $1.4 billion in taxes, interest and penalties is owed by nonfilers and those who underreported their income. The IRS agreed with the report's conclusions and said it would take a closer look at making greater use of Form 1098 reporting to catch tax cheats.
"A large number of individuals are paying a significant amount of mortgage interest and either are not filing tax returns or are filing tax returns indicating their income is not sufficient to cover their mortgage obligations and basic living expenses," the report read. "The considerable difference between expenditures and income raises very serious questions about whether these taxpayers have additional sources of income that should have been reported on their tax returns."
The report drew criticism from at least one member of Congress, who said the proposal could end up harming homeowners who have lost their jobs or seen business declines but continue making mortgage payments out of savings or other assets.
"We shouldn't presume that these struggling families are tax cheats just because they continue to make their mortgage payments despite losing their income," said Rep. Charles Boustany (R., La.), the ranking minority member on the House Oversight Subcommittee.
The report acknowledges that many homeowners are struggling to maintain mortgage payments in the current economy and that it is not clear whether nonfilers identified in the review were actually required to file tax returns. It says an IRS examination would be needed to determine whether a nonfiler or potential underreporter actually owed any additional taxes, penalties and interest.
The audit took a look at two randomly selected groups of 100 homeowners whose Form 1098 reports indicated they had paid more than $20,000 in mortgage interest in 2005. The first group consisted of 100 homeowners who appeared to have filed no federal tax return for 2005; the second consisted of 100 homeowners whose tax returns indicated they did not have enough income to cover their mortgage payments and basic living expenses that year.
Of the 100 homeowners who did not appear to have filed a tax return, 21 were identified who appeared to owe a total of $177,715 in delinquent taxes and $107,209 in penalties and interest. Of the 100 whose returns showed insufficient income, 37 were identified who appeared to owe a total of $265,018 in additional taxes and $61,233 in penalties and interest.
Based on Form 1098 data, the audit identified nearly 220,000 potential nonfilers and 245,000 individuals who appeared to have underreported their income. Based on the random samples above, the audit that an approximately $625 million in delinquent taxes, penalties and interest may be owed by nonfilers for FY2005, and approximately $800 million may be due from those who underreported their incomes on their federal tax returns that year.
The Capital Markets Sales Desk has fielded a large number of calls from customers simply asking, what’s going on? Why is the mortgage market trading lower every day? The following are reasons that could help explain why mortgages are struggling and why current market conditions are so volatile.
The question is, why are mortgages widening or losing value vs other benchmarks like treasuries? Mortgages are widening for a number of reasons. First, there are no buyers. The dealer community is quite full and has no more balance sheet to hold mortgages. In addition, with the market so volatile, dealers don’t want to own mortgages at this time. Another reason why dealers do not have an appetite for risk is quarter end. Most dealers are experiencing a quarter end in March and have become even more conservative.
Banks are not buying either. They are more concerned with retaining capital to cover potential losses in other sectors. Banks and other securities firms have written down an astonishing amount of losses since the subprime mortgage market fell apart last summer. According to Bloomberg, as of February 8th, write-downs by banks and securities firms around the world had reached $120 billion. Therefore, banks remain defensive and prefer to either retain capital or put it to work in other AAA rated sectors.
Asia has been noticeably absent as well. Asian banks generally buy on strength and its obvious there hasn’t been any strength exhibited in the mortgage market recently. Also, Asia is generally more active at the end of the month so their absence this week is not a complete surprise.
Money managers and hedge funds aren’t buying for the long term either. What they are doing is called momentum trading. They are buying at the wides (cheap) and selling at the tights (less cheap). Since they are buying and selling, they are not taking any production out of the market leaving the market to trade in a volatile fashion. The market is also trading very thin so exaggerated price movements occur when larger blocks are brought to market.
Okay, we know that dealers, domestic banks, Asia, money managers and hedge funds are not buying. But, who is selling? Well, we know servicers have been selling. When the market sells off, the current coupon increases and servicers attempt to keep their hedges in the current coupon. Therefore, servicers need to sell lower coupons (longer duration coupons) and purchase higher coupons (shorter duration coupons). This is called moving up in coupon and is a form of shedding duration. However, in large market moves, servicers may need to sell without the corresponding purchase of the higher coupon. This is called outright selling. The outright selling and duration shedding from servicers has put extra downward pressure on mortgages.
Originators are also selling. Although, with higher mortgage rates, originators aren’t selling as much as they were a month ago, the amount they are selling remains significant.
Okay, servicers and originators were the two expected suspects, but are there any other sellers? Unfortunately there are, and this group of sellers is what brings fears to the market. Thornburg Mortgage, a mortgage REIT that specializes in Jumbo and Super Jumbo mortgages received a margin call from JP Morgan in late February. A margin call is a demand for cash on an under-collateralized loan. Thornburg was unable to meet a $28 million margin call and may be forced to liquidate its holdings. We are hearing talk of a $4.4 bln list of Non-Agency ARMs and pass-throughs out for the bid from Thornburg today.
Another seller may be Carlyle Capital Corp, which is an investment bond fund located in Guernsey, UK. CCC missed four of seven margin calls totaling $37mln and another margin call notice is expected. According to Bloomberg, the fund raised $300mln in July and levered the money to purchase approximately $22bln in various forms of MBS. A portion of this $22bln is expected to be sold, and some market participants venture that a portion is being marketed today.
Although this is only two of the many accounts that participate in the MBS markets, their forced sales could have major repercussions. For example, let’s say the bonds that are sold are sold at very low dollar prices. That may cause other market participants to mark their own portfolio down to current market levels. This may cause further write downs. The fear of further write-downs has banks on the defensive to a point where they want to preserve capital. If banks are preserving capital, then they are obviously not investing in MBS.
The few investors who do have available capital are putting their money to work in more profitable sectors. Municipal Bonds and certain classes of CMBS are yielding more than Agency MBS and have a AAA rating. Despite the inherent “cheapness” in the mortgage market, there are still other safe investment options that are more preferable at the moment.
In summation, we have more sellers than buyers. The selling bias puts pressure on mortgages, forcing mortgage prices lower and wider. The usual buyers of mortgages aren’t buying or are buying other investments at cheaper prices.
Another trend we’ve noticed is a flight to quality within the mortgage market. Generally, when the market experiences a flight to quality, money is moving into US Treasuries. However, with treasury yields so low, market participants are buying the next best thing, GNMA MBS. GNMA MBS has the explicit guarantee of the US Government. Purchasing GNMAs allows an investor to enjoy the explicit guarantee while yielding considerably more than US Treasuries. In times like these, banks prefer to own GNMA MBS vs conventional MBS for a reason other than the explicit government guarantee. The reason is capital. Banks have to hold a certain amount of capital against their investments. However, they are required to hold significantly less capital against their GNMA holdings vs. their conventional MBS holdings. With the flight to quality within the mortgage market, and a preference by banks for GNMA MBS, it is no wonder why the GN/FN swap spreads have gapped out to astonishing levels. The current GN/FN 5.5% swap has gapped out from 18/32s from January 22nd, to its current level of 59/32s.
Another thing to keep an eye on is ARM issuance. The yield curve has steepened in recent weeks (current difference in yield between the 2yr treasury and 10yr treasury is 208 bps). Generally, when the curve steepens, the difference in ARM rates and 30yr mortgage rates increases. Therefore, one may assume ARM issuance is likely to increase now that the curve has steepened. However, due to the lack of liquidity in the market, ARM MBS is trading extremely cheap. In other words, the correlation between a steep yield curve and lower ARM rates has decreased. Because lenders can’t sell their current ARM production in the secondary market at respectable levels, they can’t lower their offered rates. When liquidity improves, look for ARM issuance to increase.
The Bush administration Tuesday announced a plan to help struggling homeowners avoid losing their homes to foreclosure.
Treasury Secretary Henry Paulson on Tuesday announces new help for homeowners facing foreclosure.
The program would let qualified homeowners who are at least 90 days late on their mortgage payments pause the foreclosure process for 30 days.
During the extra time provided by the program -- called Project Lifeline -- lenders and borrowers would try to work out more affordable terms, said Secretary of the Treasury Henry Paulson.
"Project Lifeline is aimed at homeowners who face a real risk of losing their home and have not yet addressed the problem," he told reporters. "Perhaps they are hoping to find a way to get current on their mortgage payments, or perhaps they don't think any solution is possible. For whatever reason, they have not yet taken action. Our hope is that today's announcement will reach them, and they will reach out immediately for help."
"Project Lifeline is a valuable response, literally a lifeline, for the people on the brink of the final steps of foreclosure," said Secretary of Housing and Urban Development Alphonso Jackson.
The plan, described as a targeted outreach to the homeowners most at risk of losing their homes, initially will involve six of the largest mortgage lenders -- Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., JPMorgan Chase & Co., Washington Mutual Inc. and Wells Fargo & Co.
A Bank of America official spoke on behalf of the six lenders at Tuesday's news conference.
"Achieving contact with homeowners to present available options is the biggest obstacle we face in avoiding preventable foreclosure," said Bank of America's Floyd Robinson.
Robinson urged homeowners contacted by their lenders to respond quickly and be ready to work toward a solution. "Homeowners can only take advantage of this program by taking action," he said.
Paulson emphasized that Project Lifeline was intended to help with all types of mortgages, not just the subprime loans that have been the focus of attention in the current troubled housing market.
The plan builds on progress begun by the administration's Hope Now Alliance, which includes lenders, investors and nonprofits.
Hope Now was announced late last year and involves freezing the interest rates of borrowers with adjustable rate mortgages.
The program announced last week it had helped about 545,000 subprime borrowers and 324,000 prime borrowers in the second half of 2007.
Bush administration officials renewed their calls for Congress to pass legislation tightening oversight of Fannie Mae and Freddie Mac Thursday, as Congress signed off on a plan to allow the companies to guarantee or purchase loans that exceed the $417,000 loan limit.
Senate Democrats on Thursday abandoned an attempt at a broad expansion of a $150 billion economic stimulus bill backed by the Bush administration and approved by the House last month.
In an 81-16 vote, the Senate sent a slightly modified version of the bill back to the House, which promptly voted 380-34 to put the bill on the president's desk.
The White House issued a statement saying President Bush could support the Senate's more limited amendments, which expand the pool of those eligible for tax rebate checks to include $300 payments to Social Security recipients and disabled veterans.
Bush said the bill "would quickly put money into the hands of the American people and provide our economy the boost it needs" and that he will sign it into law.
The economic stimulus package includes a provision that will temporarily raise the conforming loan limit to allow Fannie and Freddie to purchase or guarantee many jumbo mortgages originated between July 1, 2007, and Dec. 31, 2008.
The increase, to as much as $729,750 in high-cost areas, will also apply to Federal Housing Administration loan guarantee programs. Because the increase will be capped at 125 percent of the median home price for an area, the conforming loan limit will remain at $417,000 in markets where the median home price is $333,600 or less.
Although the increase will expire at the end of the year, industry groups like the National Association of Realtors have urged Congress to mandate a permanent increase in the conforming loan limit in passing legislation to increase oversight of Fannie and Freddie.
Permanent changes to FHA loan limits are being addressed in bills that would also lower minimum down-payment requirements and expand the pool of eligible borrowers by using risk-based pricing. Both the House and Senate have passed FHA modernization bills, but differences between them are being ironed out (see Inman News story).
Buying or guaranteeing jumbo loans will present new risks for Fannie Mae and Freddie Mac, and increase their exposure in risky real estate markets such as California, the federal official responsible for overseeing their safety and soundness told Senate lawmakers Thursday.
James Lockhart, director of the Office of Federal Housing Enterprise Oversight, said underwriting the larger loans will require new models and systems, which could take months to put in place. As Fannie and Freddie get set to venture into what is now jumbo loan territory, Congress must act quickly to ensure they don't put themselves -- and the entire financial system -- in jeopardy, Lockhart said.
Constraints placed on Fannie Mae and Freddie Mac in the wake of the management and accounting scandals that shook both companies in 2003 and 2004 helped limit their losses during the housing downturn, Lockhart said.
But as Fannie and Freddie put those scandals behind them and prepare to start purchasing and guaranteeing loans that had previously been off limits, Congress must pass legislation creating a strong, independent regulator to oversee their safety and soundness, he said.
Since August, when investors who financed mortgage lenders during the housing boom stopped buying most mortgage-backed securities not guaranteed by Fannie and Freddie, the companies have played a crucial role in providing liquidity, stability and affordability to the mortgage markets, Lockhart said.
He said the government-sponsored entities, or GSEs -- Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks -- are now financing or guaranteeing up to 90 percent of mortgage originations.
"The GSEs have become the dominant funding mechanism for the entire mortgage system in these troubling times," Lockhart said in testimony before the Senate Banking Committee. In doing so, "they have been reducing risks in the market, but concentrating mortgage risks on themselves."
Fannie and Freddie reported combined losses of $3.5 billion during the third quarter, and both companies are expected to post annual losses for the year -- the first annual loss in Freddie Mac's history, and the first in 22 years for Fannie Mae.
The losses stem mostly from write-downs of investments, rather than borrowers defaulting on loans Fannie and Freddie have purchased or guaranteed. Fannie and Freddie hold about $230 billion in mortgage-backed securities (MBS) that carry AAA investment-grade ratings but are backed by subprime or alt-A mortgages, analysts at Credit Suisse estimate. Credit Suisse analysts project the companies could be forced to recognize $16 billion in fourth-quarter write-downs in the value of those securities.
The potential write-downs identified by Credit Suisse are greatest at Freddie Mac -- between $8 billion and $11 billion -- which reports fourth-quarter results Feb. 28. Fannie Mae faces an estimated $2.5 billion to $5 billion in MBS write-downs, according to Credit Suisse.
Lockhart told Senate lawmakers he thinks Credit Suisse's projections are too high, but said allowing Fannie and Freddie to expand their loan purchase and guarantee activities "would be imprudent unless (regulators have) significantly more powers and more flexibility to use those powers."
Thursday's hearing was held before the Senate signed off on the economic stimulus package that includes the temporary increase to the conforming loan limit.
The White House had opposed increasing the conforming loan limit unless Congress passed legislation tightening oversight of Fannie Mae and Freddie Mac. But Treasury Secretary Henry Paulson last month agreed to a temporary increase in the limit as part of the economic stimulus bill approved by the House. Paulson said he did so because Democratic leaders, including Senate Banking Committee Chairman Chris Dodd, promised to take prompt action on so-called GSE reform legislation.
Although the House has passed bills that would strengthen oversight of Fannie and Freddie -- most recently last May -- disagreements over limits on the GSEs loan portfolios and minimum capital requirements have been obstacles to Senate passage.
Thursday's hearing was held as Dodd and Sen. Richard Shelby, R-Ala., draft their own version of a GSE reform bill. Dodd promised prompt action on the issue, saying he and Shelby have proven capable of working together to draw up legislation in the past.
Fannie and Freddie are currently regulated by OFHEO, while the Federal Home Loan Banks are regulated by the Federal Housing Finance Board. The GSE reform bill passed by the House last year, HR 1427, would abolish OFHEO and FHFB and create a single, independent regulator to oversee the GSEs. The new regulator, the Federal Housing Finance Agency (FHFA), would be granted powers similar to those of bank regulators.
Assistant Treasury Secretary David Nason told members of the Senate Banking Committee that the new regulatory agency should have the power to place the companies into receivership if they become insolvent.
Treasury officials have waned that the perception that the government will bail Fannie and Freddie out if they run into financial trouble causes investors to underestimate the risk of lending money to Fannie and Freddie or investing in securities they guarantee.
"Providing the new regulatory agency the ability to complete an orderly wind down of a troubled regulated entity also encourages greater market discipline by clarifying that investors may suffer losses," Nason said.
Nason and Lockhart said FHFA should have more flexibility in setting minimum and risk-based capital requirements. By statute, Fannie and Freddie are required to maintain capital equal to 2.5 percent of assets, and Congress also created a rigid stress test for determining risk-based capital requirements.
Lockhart said OFHEO needs more flexibility to regulate minimum capital, and that the current stress test for risk-based capital requirement "is just not working, as it has yet to capture the risks we are currently observing."
Lockhart said the losses Fannie and Freddie are reporting now would have been greater if not for consent agreements the GSEs entered into, after accounting and management scandals forced both companies to fire top managers and restate several years of earnings.
The agreements restricted growth in the GSEs' loan portfolios, and boosted capital requirements by 30 percent, to 3.25 percent of assets.
"In retrospect, those agreements ... especially, the growth restrictions and the capital requirements, were extremely important in reducing the credit losses at Fannie Mae and Freddie Mac and preventing major disruptions of the conforming loan market system," Lockhart said.
Fannie and Freddie have made "major progress" toward instituting the management and accounting changes called for in the agreements, Lockhart said, and in September OFHEO eased restrictions on the GSEs' loan portfolios to allow 2 percent annual growth.
The portfolio restrictions will be lifted altogether when Fannie and Freddie return to regular financial reporting, which Fannie will do by the end of the month, Chief Executive Officer Daniel Mudd testified.
Lockhart said Fannie and Freddie have not yet utilized the additional capacity, and could grow their combined portfolios by $100 billion in the next sixth months, to $1.5 trillion, without bumping up against the new limits.
Higher capital requirements instituted in the wake of the scandals have also restricted Fannie and Freddie's growth, requiring them to raise nearly $14 billion during the fourth quarter by selling preferred stock and cutting dividends to shareholders.
The move to boost capital requirements by 30 percent, which was instituted four years ago, "was the right thing to do at the time," Freddie Mac Chief Executive Officer Richard Syron said in his written testimony to the committee.
But requiring the GSEs to maintain "the same leverage ratio as banks" would require Fannie and Freddie to institute "enormous price increases" and threaten their ability to provide liquidity to mortgage markets, Syron said. The new regulator should only be given the power to increase minimum capital standards temporarily, Fannie and Freddie executives said.
Lockhart insisted that the existing 2.5 percent capital requirement -- and the temporary increase imposed in the aftermath of the accounting and management scandals -- are low compared to other financial institutions.
Syron said Freddie Mac executives are also "very concerned" about the prospect of Congress imposing more stringent affordable-housing goals, saying "a disproportionate share" of credit losses come from loans that qualify for affordable-housing goals.
When asked by Sen. Shelby why Fannie and Freddie had purchased so many non-agency mortgage-backed securities as investments, Lockhart said those investments helped the GSEs meet affordable-housing goals set by the Department of Housing and Urban Development (HUD).
Nason and Lockhart said creation of a new independent regulator would remove HUD from the process of approving new loan programs, setting housing goals, and oversight of Fannie Mae and Freddie Mac.
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