In a twist of fortune, it appears the GSEs are — for once — looking to follow the lead of the Federal Housing Administration, with their regulator hinting Wednesday afternoon that a plan to allow for streamlined refinancings is under consideration at both Fannie Mae (FNM: 0.70 0.00%) and Freddie Mac (FRE: 0.75 0.00%).
In particular, the GSEs are considering a plan to allow some borrowers to refinance without the use of an updated appraisal.
“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, according to a Bloomberg report. “That’s an issue that’s being discussed. They’re looking at it.”
The same Bloomberg report managed to find analysts, such as Paul Miller at FBR Capital Markets, in a lather over the proposed changes, calling it a “disaster.” Josh Rosner at Graham Fisher & Co. also jumped on the overreaction bandwagon, too. “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,” he told the news service.
Every one of them is missing the point here.
The U.S. Department of Housing and Urban Development has permitted so-called “streamlined refis” without appraisals on FHA and VA loans since the early 1980s, according to a department Web page. It’s a program limited, however, to rate and term refis — no cash-out refis here — and borrowers must be current on their loan.
In contrast, the GSEs have always required a new appraisal on any refi, whether cash-out or a rate or term refinancing. It seems likely, although Lockhart did not specify details, that Fannie and Freddie are looking to follow the lead of the FHA in terms of making it easier for borrowers to refinance in certain situations.
The kink here is that in the case of the FHA, the government has underwritten any insurance on the loan; in the case of the GSEs, any mortgage insurance is underwritten by a private party, and so ultimately the FHFA would be working with a number of PMI providers to implement a rate and term streamlined refinancing program.
That this sort of program came as news to some analysts and reporters, however, suggests there is a new learning curve for some in the industry: and that’s to cozy up to the somewhat arcane world of FHA lending. Twelve months ago, reporters and some analysts were struggling to come up to speed on secondary market dynamics and the mechanics of the private-party mortgage market. Now, it appears, they have some learning to do around the mechanics of FHA lending.
The GSEs are set to announce a streamlined loan modification process in the next few days, as part of an effort by the FHFA to implement a more effective method of working with troubled borrowers. A streamlined rate and term refi program will likely be the least controversial aspect of all of it, especially if it is modeled explicitly after the existing FHA program.