Mortgage Refinancing Initiative to Help Low-Income Borrowers

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WASHINGTON – Federal Regulatory Authority

Fannie Mae

FNMA -3.57%

as well as

Freddie Mac

FMCC -5.08%

on Wednesday unveiled a new program aimed at helping more households lock in historically low interest rates targeting low-income borrowers who missed out on the refinancing boom last year.

The Federal Housing Finance Agency, which oversees two state-controlled mortgage giants, has announced plans to ease loan requirements, simplify paperwork, and remove certain fees for borrowers looking to refinance their loans. The program is expected to be launched by the summer.

“There was a surge in refinancing last year, but more than 2 million low-income families did not take advantage of record low mortgage rates through refinancing,” said FHFA director Mark Calabria.

To benefit from the change, borrowers will need to earn 80% or less of the median income in their area and not miss more than one mortgage payment in the past 12 months. The program only applies to borrowers with existing loans secured by the mortgage giants, and lenders will be required to participate in it.

Mr Calabria said in an interview that the program can help borrowers whose income has dropped during the pandemic and who would otherwise not be eligible for refinancing due to companies’ underwriting requirements. The FHFA estimates that borrowers who take advantage of the new refinancing program can save an average of $ 100 to $ 250 per month.

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Fannie and Freddie do not issue mortgages. Instead, they buy mortgages and wrap them up in securities that they sell to investors. Their promise to heal investors in the event of default lies at the heart of the popular 30-year fixed rate mortgage.

Despite the pandemic, 2020 has brought good news for the mortgage market. 30 year fixed rate mortgage fell below 3% in July as well as stayed there for several months

Low rates have pushed about 8.8 million homeowners to refinance in 2020, according to the data.

Black Knight Inc.,

a mortgage technology and data company. Of these, 6.1 million were refinanced into loans secured by Fannie and Freddie.

However, borrowers with less than clean credit history – who tend to have lower incomes – have trouble refinancing. Mortgage loan availability, indicator of lenders’ willingness to issue mortgage loans, near the lowest level since 2014, according to the Mortgage Bankers Association.

The tight credit environment is indicative of a growing market split: Business for mortgage lenders is boomingbut their loans are almost exclusively for borrowers with excellent credit history, especially those supported by Fannie and Freddie.

According to the Urban Institute, in January 2019, 29.3% of Fannie Mae’s refinancing fell on borrowers with a credit rating below 700. This share fell to 14.8% in January 2020 and to 9.4% in January 2021. The best rates on loans secured by companies are generally for borrowers with a credit rating above 740.

There are several key players in the US mortgage market that play an important role in this process. Here’s what investors need to understand and what risks they take when investing in the industry. Telis Demos from WSJ explains. Photo: Getty Images / Martin Barraud

“Hard credit is a major obstacle for many borrowers who want to refinance their mortgages even if they already have a loan, and a rate cut will make borrowing less risky,” Laurie Goodman and Edward Golding of the Urban Institute wrote this month.

In recent months, Democratic lawmakers, consumer advocates and industry officials have pressured FHFA officials to help low-income borrowers.

“As rates fall, borrowers with lower incomes and lower credit ratings, who may disproportionately benefit from mortgage savings, are less likely to receive refinancing loans at a low rate,” said Ohio Senator Sherrod Brown and a group of Senate Democrats. wrote in a November letter Mr. Calabria.

Among other benefits of the new program, borrowers with loan balances of $ 300,000 or below will not have to pay the modest refinancing surcharge introduced by Fannie and Freddie in December. They will also receive an appraisal loan of up to $ 500.

Consumer advocates and housing experts welcomed the relief, but said it was an open question how many borrowers would benefit. Some have wondered why borrowers need loan approval for refinancing, as Fannie and Freddie already bear the risk of their loan. Others said that borrowers in an abstinence plan that allows them to skip monthly payments and pay them later probably won’t be eligible for the new program, although they may still be eligible for regular refinancing.

“This is a good start,” said Ms. Goodman. “It seems that the refinancing optimization program could be broader and reach more borrowers.”

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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