“If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit?” Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”
Fannie and Freddie, which own or guarantee $5.3 trillion of the $12 trillion U.S. home loan market, must consider that some homeowners who need to refinance owe more than their property is worth and wouldn’t qualify for the necessary mortgage insurance, Lockhart said. Another consideration is the issue surrounding the valuation of refinanced loans on the companies’ balance sheets.
“It sounds like a disaster,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia. “What you’re doing is postponing the problem into the future and not giving the system time to fix itself,” he said, adding that regulators are bowing to political pressure.
Doing away with appraisals may allow the government- sponsored enterprises to get around a law that prohibits them from financing loans to borrowers who hold less than 20 percent of the equity in their home without mortgage insurance.
The S&P/Case-Shiller home-price index dropped 17.4 percent in September from a year earlier after a 16.6 percent decline in August. The gauge has fallen every month since January 2007.
“An upside-down mortgage is a difficult thing to deal with,” Lockhart said.
A Crazy World
Washington-based Fannie and McLean, Virginia-based Freddie accounted for 73 percent of all new mortgages in the first nine months of this year as private sources of financing contracted, Lockhart said.
“To refinance loans without any concern for collateral value suggests a world in which no lender would ever hold a loan they refied and no investor would ever buy, unless it carried an explicit federal guarantee,” said Josh Rosner, an analyst for research firm Graham Fisher & Co. in New York.
Freddie announced in October 2007 that beginning Jan. 2, it will eliminate appraisals for streamlined refinancings of mortgages it owns if the seller of the loan is willing to guarantee that the underlying property hasn’t declined in value since its most recent appraisal, according to Brad German, a company spokesman. He declined to discuss Lockhart’s comments.
Brian Faith, a Fannie spokesman, didn’t have an immediate comment.
Lockhart also said today the Federal Housing Administration will likely supplant Fannie and Freddie as the largest source of new home loans as borrowers find it harder to obtain the mortgage insurance necessary to qualify for non-government financing.
FHA, a government agency that insures loans for private lenders, may overtake Fannie and Freddie within the next quarter, Lockhart said in his speech to the Women in Housing & Finance, a society of industry professionals.
“You will probably see in the next quarter the Fannie and Freddie lines going down and FHA coming up,” Lockhart said. “Fannie and Freddie are so dependent on mortgage insurers because they can only buy loans with 80 percent loan-to-value ratios and they aren’t able to do as much.”
“In some markets, the mortgage insurers have tighter standards than Fannie and Freddie,” Lockhart said. “So if someone wants more than an 80 percent loan-to-value, they have to go to FHA.”
“That’s why some of FHA’s buying is increasing so dramatically,” he said. “They, like everybody else, are under capital pressure.”
FHA has taken a larger role in helping troubled homeowners refinance their mortgages partly because of Fannie and Freddie higher equity requirements. Those standards have become more of an obstacle as mortgage insurers including PMI Group Inc. and Radian Group Inc. are now charging higher prices and being more selective in their coverage to curb losses stemming from a surge in foreclosures.