Two Democratic senators push to streamline, speed refinancing process

Specifically, this bill would prohibit Fannie and Freddie from charging risk-based fees to refinance any loan they already guarantee, eliminate appraisal costs, remove barriers to competition, provide an opportunity to save taxpayer funding by reducing defaults and foreclosures, according to a summary of the draft.

So far, the bill has support from groups such as the Mortgage Bankers Association, the National Realtors Association and the National Association of Home Builders, although they have some suggestions on how to improve the legislation. 

During the housing boom, prices rose precipitously then bottomed out following the crash — prices in the Standard & Poor's/Case-Shiller home-price index have fallen 35 percent since the housing market crashed nearly six years ago. 

Christopher Mayer, a professor of real estate at Columbia Business School, told the panel that had the FHFA expanded its refinancing policy to let millions of homeowners trapped in high interest rate mortgages to rework their mortgages at lower rates when he began advocating for it nearly four years ago, the housing market would have produced fewer foreclosures and saved taxpayer money. 


"Had the FHFA adopted such a policy at that time, conservative estimates suggest that it likely would have prevented over 300,000 defaults, saved taxpayers and GSEs $10 billion in insurance costs from excess foreclosures, helped stabilize the housing market, and saved homeowners about $20 billion annually in mortgage payments," Mayer said. 

Under the changes proposed in the bill, about, Mayer estimates that about 11.6 million new refinancings would take place and Fannie and Freddie would earn additional profits of as much as $23.7 billion, predominantly through preventing 400,000 defaults, making the move profitable for taxpayers. 

There are currently 10.9 million borrowers who took out loans before the June 1, 2009 cut-off date — the Menendez-Boxer bill extends the date of eligibility an additional year, through May 31, 2010, according to Laurie Goodman, senior managing directory, Amherst Securities Group.

To cover any potential losses, Fannie and Freddie could charge a slightly higher guarantee fee, Mayer suggested.

The proposed bill would permit the mortgage giants to charge up to 10 additional basis points over the existing ongoing guaranty fee for the refinanced loans only to make up for any losses, according to the draft. 

In late October, the FHFA announced changes to the HARP program to increase eligibility to allow more borrowers to benefit from record low mortgage rates, with a focus on helping underwater borrowers and increasing competition between servicers. 


That changes include raising the loan-to-value cap and extending the program through 2013. 

However, these reduced costs would apply only to HARP-eligible borrowers with less than 20 percent equity, according to the draft. 

Overall, HARP was designed to help Fannie and Freddie borrowers who have loan to value ratios greater than 80 refinance into another government-backed mortgage. So far, it has helped far fewer than expected — about 1.2 million compared with estimates of upward of 5 million. 

"The most serious problem is that existing rules continue to reduce competition, resulting in higher profit margins for large banks and scarce options for struggling borrowers," Mayer said. 

"It's time to benefit the homeowners and taxpayers," He said. 

For Goodman, to make any refinance program work, there much be competition that permits a different servicer to refinance a borrower on the same terms that apply to the current servicer. 

"This will result in much better rates to the borrower, and much more refinancing of the targeted HARP population," she said. 

Debra Still, chairman-elect at the Mortgage Bankers Association, said the legislation addresses "obstacles that have prevented borrowers who have conscientiously made their mortgage payments from reaping the benefits of historically low interest rates and other assistance programs."

'We are particularly intrigued by the sections of the bill that would remove existing restrictions of the HARP based on arbitrary requirements such as who services the loan, whether the borrower’s loan-to-value ratio is above or below 80 percent and which government sponsored enterprise owns the current loan" Still said. 

"It is likely that if many of the provisions in this bill were included in the first version of HARP, we probably would be much further along in the recovery," she said. 

She cautioned that the legislation would represent the third version of HARP and is being introduced at a time when the October changes are just beginning to kick in and show signs of progress. She said any changes in the program take time to implement and would, thusly, take time to produce results. 

"Therefore we believe it would be useful to monitor HARP 2’s effectiveness as you continue the deliberations regarding this draft legislation to assess the tradeoffs between the benefits the bill provides to borrowers and the operational costs to the GSEs, lenders, and taxpayers," she said. 

Sen. Jeff Merkeley (D-Ore.) said if the bill's "little tweaks could save family $8,000 lets's get moving." 

Anthony Sanders, professor of finance, George Mason University School of Management, said the bill needs to be scored and examined for all its moving parts and how any additional changes could help or hurt the mortgage market, homeowners and the economy. 

"We're in unchartered territory that could devastate American taxpayers," he said. 

The bill also makes several other changes, including: 

• Eliminates employment and income verification requirements, which housing experts say can slow the refinancing process. Lenders would send eligible borrowers a pre-approved application packet that they need only sign and return.

• Prohibits lenders who do not permit a second lien to be resubordinated to a refinanced loan, as long as that refinanced loan does not increase the risk faced by the second lien holder, from receiving a goverment guarantee on any new loans. 

• Require mortgage insurers to transfer coverage to refinanced loan.