In new efforts to help homeowners at risk of losing their homes, some state housing finance agencies (HFAs) are developing refinance programs, while many others are wrestling with whether and how they might do so.
HFAs in Ohio, Colorado, Massachusetts, New York, Pennsylvania, and Maryland have launched refinance programs. New Jersey, Wisconsin, Minnesota, and other state HFAs are planning such programs.
Garth Rieman, director for housing advocacy and state initiatives at the National Council of State Housing Finance Agencies, said that the HFAs “are looking at owner needs and program benefits, but they don’t want to be perceived as bailing out lenders and investors for making unscrupulous loans or owners who should have understood the consequences of their loans. They are trying to help owners who accepted unsuitable loans unknowingly. They are also trying to avoid perpetuating harmful negative lending patterns by getting borrowers into the more suitable first-time products they offer.”
HFAs have generally offered subsidized-rate loans for first-time owners but lack experience with refinance products and have limited resources to start refinance programs, he added.
Ohio, which has one of the country’s highest foreclosure rates, is the first state that has implemented a refinance program, Rieman said. The Ohio Housing Finance Agency (OHFA) provides a 30-year fixed-rate conventional loan to borrowers who are up-to-date with payments on their current loan. The refinance loan is a Fannie Mae My Community Mortgage product with a Fannie Mae guarantee to investors who purchase the loans.
Ohio’s refinance program, which is restricted to borrowers with incomes at or below 125 percent of county median gross income, requires full documentation, a full appraisal, private mortgage insurance if the loan is above 80 percent loan-to-value, and at least four hours of homeowner counseling. In addition, OHFA offers a 20-year fixed-rate second mortgage for up to 4 percent of appraised value for closing costs, escrow accounts, and attorney or late fees.
Joel Ghitman, OHFA’s director of homeownership, said that between April and the end of July 2007, lenders closed 15 loans totaling $1.9 million with another 101 loans in the pipeline. About 150 of the 185 lenders that normally participate with OHFA are originating the refinance loans, he said. The interest rate on both the first and second mortgages in the program was 6.75 percent initially and 7.50 percent at the end of July 2007.
Ghitman said, “Our intent is to get borrowers who are in an adjustable mortgage, such as a 2/28, into a fixed-rate product before they become delinquent on their payments. It’s not designed to be a foreclosure prevention and rescue product.” He said that the refinance applications coming into OHFA were prime, subprime, and Alt-A loans. He added that the agency had never previously made refinance loans and is still fine-tuning the product, which is initially funded through the issuance of taxable bonds.
Ghitman said that OHFA cannot be the sole solution for Ohio’s foreclosure crisis and explained that the program has two major drawbacks. First, servicers have been uncooperative and unwilling to write off the difference between the original appraisal and the current appraisal, which is lower because of falling home prices or because the original appraisal was inflated, he said. Second, many applicants are 60 to 120 days’ delinquent and late payments become one of multiple risk factors that make them ineligible under Fannie Mae’s Desktop Underwriter automated system, he added.
“Until we can get a better profile of the borrower, and demonstrate that these loans perform well, lenders and Fannie Mae are going to be very conservative in their underwriting guidelines,” Ghitman said.
Ghitman said that there is often a disconnect between lenders’ collection departments and loss mitigation departments. He explained: “Once it goes over 30 days, a loan is referred to the collections department. After 60 days, it goes to a loss mitigation department, which has the ability to do a workout. Homeowners who have been pursued by the lender’s collections staff find it hard to believe that the loss mitigation staff really wants to work with them. Some of the loans should be moved to the loss mitigation department sooner because the department has the authority to do a workout.
“Housing counseling nonprofits can play a huge role in bridging the servicer and borrower.”
Ghitman observed that automated underwriting works well for purchase loans but not as well for refinance loans. He thought manual underwriting was needed.
He said that OHFA and its lenders decided to use Fannie Mae’s My Community Mortgage for the refinance program because they had used the product for OHFA’s first-time homeowner program. He said the refinance program allows use of Fannie Mae’s Expanded Approval process under the My Community Mortgage program.
Ghitman said: “I would really like to have the ability to give a new loan with a comparable payment to borrowers whose financial difficulty lies solely in the rate reset.” He concluded: “The earlier we can get in touch with borrowers, the more options can be made available to them. Early intervention is critical to keeping these owners in their homes.”
Meanwhile, Maryland is offering a Lifeline refinance mortgage through participating lenders. The program has limits pertaining to maximum household income, current appraised value, and loan to value ratio. Counseling is required for applicants who have credit scores below 680.
A program started earlier this year by the Delaware State Housing Authority provides homeowners who are 60 days or more delinquent in mortgage payments with assistance for up to 12 months. It is intended to help owners who have fallen behind on mortgage payments owing to circumstances beyond their control, such as temporary loss of employment, illness, or divorce.
As of the end of July 2007, 11 loans totaling about $130,000 have been approved while 26 others are in process.
The program was modeled after Pennsylvania’s Homeowner’s Emergency Mortgage Assistance Program.