Fannie Mae and Freddie Mac have come up with a plan that is much more in favor of borrowers, especially for second home owners and small investment properties, than what was proposed by the White House and Treasury earlier.
The guidelines sent to lenders by Fannie and Freddie clearly states that second home and small rental properties are eligible, provided that their mortgages already are in the companies’ portfolio have been paid on time as opposed to the initial proposal where refinancing would be for owner-occupied primary residences only.
An estimated 4 million to 5 million owners whose mortgages are with Fannie and Freddie are eligible for refinancing to lower rates even though they do not normally qualify due to decline in property value.
They started accepting applications of lenders who are willing to participate, although no loans are scheduled for funding by Fannie or Freddie until the beginning of April.
To make their programs as widely accessible as possible, their instructions offer a variety of concessions, wherein credit scores occupy the top most priority. Both companies plan to waive their usual minimum borrower credit score requirements for most applicants.
Participating lenders will still scan through credit files to verify scores, but generally there’s no specific cutoff point below which one can be rejected.
For some highly leveraged homeowners, the companies are not having any limits on the amounts of existing second mortgages as long as the secondary loan creditors agree to re-subordinate their liens behind the new Fannie or Freddie funded mortgage.
Both companies are suspending their standard rules requiring purchase of private mortgage insurance coverage when borrowers’ equity stakes are less than 20 percent. If loans carried mortgage insurance coverage when Fannie or Freddie first acquired them, that coverage will remain in force. But borrowers who never had insurance, and now have depressed equity stakes below 20 percent, are not required to purchase new coverage.
They also plan to lessen the burden of other typical costs in connection with the mass refinancing, including appraisals, lender fees and closing expenses.
Both companies emphasize that their refinancing is going to be limited strictly to customers who have paid their mortgages on time. Despite all this there is a major difference between Fannie and Freddie in procuring a new replacement loan.
Freddie requires borrowers to apply to their existing lender or service for terms and rate quotes. Where as Fannie, allows borrowers to contact any of its approved servicing and lending partners nationwide for quotes.
Fannie spokesman Brian Faith said “being able to shop their refinance business can help reduce rates and terms.”
Freddie Mac’s German said his company is keeping refinance with the current lender or servicer because that will cut down on time and costs. This appeals to many as it is a simpler process with no re-underwriting for most borrowers. Since the current servicer already has all the necessary information regarding the existing mortgage, he is in a better position to offer a fast and less expensive refinance.
