Tennessean
Retooled federal program affects Fannie Mae and Freddie Mac loans
12:32 AM, Nov. 6, 2011
For some of the 67,000 homeowners in Middle Tennessee whose properties are financially underwater or near it, partial relief could be close at hand, thanks to a retooled federal program affecting droves of Fannie Mae and Freddie Mac loans.
President Barack Obama late last month announced changes to a federal refinancing program that will allow hundreds of thousands of homeowners nationwide to refinance their mortgages, some of whom may be able to take advantage of historically low interest rates.
But for other homeowners who haven’t kept their monthly payments current, the situation may remain bleak. The revamped program applies only to borrowers who haven’t fallen behind on their mortgages, even if they owe more on the house than it’s currently worth.
Despite such caveats, the program could put more money in the pockets of many Middle Tennessee homeowners who will end up with lower monthly rates after refinancing.
“It could boost consumer spending because money that used to go to banks to pay for mortgages will now be used on other things,” said Gregory Brown, an economics professor at Martin Methodist College in Pulaski, Tenn. “The new program has the potential to have a real stimulus effect on the local economy.”
Underwater cap gone
The Home Affordable Refinancing Program, or HARP, was introduced in spring 2009 and was intended to assist many troubled borrowers with refinancing.
The rub, though, was thatthe program applied only to borrowers who were no more than25 percent underwater on their mortgage loan.
Fewer than a million borrowers refinanced under HARP, which was expected to help many millions more.
The new rules remove the underwater cap and scrap some appraisal requirements in addition to nixing closing fees and other charges associated with the former program. Thus, refinancing will be cheaper and easier.
“It is certain that many more borrowers will benefit than would have otherwise,” said a statement from CoreLogic, a real estate data firm.
“There are no silver bullets that will solve the issues facing the housing and mortgage markets, only solutions that play their small part,” the statement continued.
Nationwide, nearly 1 in 4 of the country’s homeowners are underwater, according to CoreLogic. That’s roughly 11 million borrowers.
In the Nashville area, 13 percent of all homeowners, about 42,000 borrowers, are underwater, and an additional 25,000 people are on the cusp, owing more than their home’s value, according to the firm’s latest report.
Local lenders expected to embrace program
The announcement of the revamped program from the Federal Housing Finance Agency, the overseer of mortgage giants Fannie Mae and Freddie Mac, noted that the new program relies on private bank participation, which is voluntary.
A spokeswoman for Bank of America confirmed by email that the bank will participate in the new HARP program. Other big lenders are expected to follow suit.
Furthermore, banking experts in Middle Tennessee expect local lenders to also embrace the rules.
The federal government will provide lenders with pricing guidelines on Nov. 15, and some banks will begin taking applications by Dec. 1.
“What bank would say no to helping borrowers lessen their burden? I can’t imagine any,” said Ross Kinney, Pinnacle’s residential and mortgage manager. “The legislation is aimed at big banks, and they’re the ones who will make the decision.”
Geoff Hill, president of Fifth Third Bank’s mortgage division, said the program will shore up housing markets in certain hard-hit pockets of Florida and Nevada far more than it will affect Middle Tennessee.
Still, “it will get people talking about the program again. There are people in Nashville who are already eligible and don’t know it,” Hill said.
Nearly half of the country’s mortgages are backed by Fannie or Freddie.
When one of the two agencies guarantees a loan, the lender promises the loan will meet federal standards. If it fails to, Fannie or Freddie can force the lender, typically a bank, to put the loan on its books.
Consequently, banks were hesitant to issue new loans for underwater homeowners to refinance because they wanted to steer clear of more troubled loans.
But the new rules reverse that.
Now, Fannie and Freddie no longer have the authority to force a lender to buy back a sinking loan. The government justifies the change by insisting that nearly all the loans eligible for the program are “seasoned,” meaning they are not expected to fail, according to a FHFA statement.
“That provides a big incentive for banks to do this,” economist Brown said.
Borrowers must be current on payments
The revised HARP applies only to borrowers who have been current on their mortgage payments the past six months.
That means hardscrabble borrowers who are unemployed or underemployed are still out of luck, according to local housing advocates.
“Most people I see who are underwater are in a crisis mode. They haven’t been current for months,” said Ron Williams, senior housing counselor for the Woodbine Community Organization. “I think it will help a handful of people, but every federal program I’ve seen so far has failed to live up to expectations.”
Others, including some local mortgage bankers, also remain skeptical.
“We want to minimize risk to the bank and be able to assist the public as much as possible, but I don’t know if it’s going to be as widespread as some are predicting,” said Steve Swain, senior vice president of direct lending for First Tennessee Bank.
“For some people, it’s just putting off the inevitable,” Pinnacle’s Kinney said, suggesting that borrowers who do qualify may end up in foreclosure on their homes anyway.
Edsel Charles, chairman of MarketGraphics research group based here, said the program does not address declining home values, which, he predicts, will soon return to pre-crisis levels in Nashville.
“I’m glad there’s some effort to fix what is a very difficult issue, but only time will fix the equity problem,” Charles said.
Alice Walker, president of the Greater Nashville Association of Realtors, said any effort designed to provide incentives for homeowners to stay in their homes should be applauded.
Homeowner stability helps entire neighborhoods, she said.
“For a certain segment of homeowners, tweaking this program can be quite effective at that,” Walker said.
Contact Bobby Allyn at 615-726-5990 ormailto:ballyn@tennessean.com.
