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Surprise on Refi Revamp: Key Regulator Agrees to Major Program Reforms

Federal Housing Finance Agency chief Edward DeMarco had blocked earlier efforts to help struggling homeowners, but now he’s signed onto a major change to encourage banks to refinance underwater mortgages.

Last month, we noted that the Obama administration's push to allow more underwater homeowners to refinance faced a major barrier: the regulator for Fannie Mae and Freddie Mac. Federal Housing Finance Agency chief Edward DeMarco had blocked earlier efforts to help underwater homeowners.

But this morning, the administration announced major changes to its refinancing program -- changes beyond what analysts were expecting.

One of the main reasons the program hadn't reached many homeowners is that banks have been reluctant to participate. The revamped program offers the banks a major incentive: If they grant a homeowner a new loan, they will no longer be on the hook to buy back the previous loan, even if it was not properly underwritten. That removes a large potential risk to the banks.

Launched in 2009, the Home Affordable Refinance Program (HARP) was designed to allow homeowners with little or no equity in their homes to take advantage of low interest rates, so long as their loans were backed by Fannie Mae or Freddie Mac, which back more than half of all U.S. residential mortgages. Normally, such homeowners wouldn't qualify for refinancing. Back then, the administration said "up to 4 to 5 million" homeowners would be able to take part.

But the program has fallen far short. As of August, about 894,000 homeowners had refinanced through the program. And only about seven percent of those homeowners were significantly underwater.

This morning, the Federal Housing Finance Agency announced a slew of reforms to improve the program's reach, changes that it estimated could double the number of homeowners helped. The program will now be open to all homeowners with little or no equity, regardless of how underwater they are, provided they got their loan before June 2009. (Previously, the program had been limited to borrowers who were no more than 25 percent underwater on their loan).

Many of the specific reforms seek to make it cheaper for homeowners to refinance by reducing various costs and fees associated with refinancing. Some changes are technical and address problems that homeowners with mortgage insurance or a second mortgage have encountered in getting a refinance.

But on a conference call with reporters this morning, administration officials emphasized one reform in particular that's likely to be key: releasing lenders from so-called buy-back risk.

When Fannie or Freddie buy or guarantee a loan, they do it on the basis of a promise by the lender -- usually a bank -- that the loan meets certain standards. If it doesn't, the companies can force the lender to buy it back, which they've done for billions of dollars' worth of mortgages. So banks had recoiled from granting new loans to underwater homeowners because they feared doing so could trigger a repurchase of the original or new loan if the homeowner defaulted.

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But under the new plan, Fannie and Freddie will waive their right to force the lender to buy back the original loan.

Why did FHFA's DeMarco agree to these changes? As we noted last month, DeMarco has often stressed conserving Fannie and Freddie's assets so as to limit the level of taxpayer support. So far, taxpayers have pumped $169 billion into the companies to keep them afloat.

In a statement about the reforms today, the FHFA argued that it waived its right to force repurchase of the loans because nearly all the loans eligible for the new program seem to be good ones: "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." Defects in underwriting tend to show up in the "first few years of the mortgage," according to the statement.

"We feel pretty confident that if there were defects on the original loan, it's probably shaken itself out at this stage," said Meg Burns, a senior FHFA official.

Burns did say that Fannie or Freddie could force the lender to buy back the new, refinanced loan if there were a defect in its underwriting. HARP has simple, streamlined underwriting standards that involve the bank verifying that the homeowner has regular income.

When asked this morning why DeMarco changed course, administration officials cited a number of factors, such as the fact that the barriers to the program's success have become more and more apparent. But on the conference call this morning National Economic Council director Gene Sperling also cited bipartisan support for these types of reforms and increasing political pressure on the FHFA to adopt them.

Earlier this month, 16 senators (12 Democrats and 4 Republicans) wrote a letter to DeMarco and the administration calling for changes to HARP. Sen. Barbara Boxer, D-Calif., who met with DeMarco this summer, has been pushing a bill to implement these reforms. Sen. Johnny Isakson, R-Ga., is a co-sponsor. In the House, Democrats have also been pressuring DeMarco on the issue and called for a new director of the FHFA earlier this month after a recent meeting.

In this morning's conference call for reporters, HUD Secretary Shaun Donovan said that in exchange for relinquishing the right to force buy backs Fannie and Freddie will charge a "modest fee" for each refinance. News media reported what he said, but later FHFA officials told ProPublica that Donovan was incorrect and there would no such fee. HUD did not immediately reply to a request for comment.

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