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Mass Refi Plan Unveiled for Non-GSE Borrowers

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A massive refinance program for borrowers who don’t have conventional agency mortgages was one of several initiatives announced Wednesday by President Obama. But the multi-billion-dollar tab for the program will be picked up by the nation’s lenders.

Congress is being asked to pass legislation that will create a new streamlined refinance program.

The program requires that borrowers are current on their loan payments and that their loans not be owned or guaranteed by Fannie Mae or Freddie Mac since those loans are already covered by the recently expanded version of the Home Affordable Refinance Program.

The latest plan calls for loans to be refinanced through the Federal Housing Administration even if FHA doesn’t already insure their existing mortgage.

Eligible borrowers can refinance non-jumbo loans as long as they have made their last six payments on time and had no more than one missed payment during the past year. Only owner-occupied single-family residences will be considered as security.

No tax returns or appraisals would be required, though employment must be verified. Unemployed borrowers will only be considered if they meet the other requirements, present limited credit risk and go through the full underwriting process.

The minimum FICO score will be 580, a requirement that administration says nine-in-10 borrowers meet.

Maximum loan amounts would be based on existing FHA loan limits, which range from $271,050 to $729,750.

Loan-to-value ratios would be limited to 140 percent, and lenders would be required to write down an amount to stay within the maximum LTV. However, it’s not clear what incentive a lender will have to write down the balance on a performing loan.

“While the government cannot fix the housing market on its own, the president believes that responsible homeowners should not have to sit and wait for the market to hit bottom to get relief when there are measures at hand that can make a meaningful difference, including allowing these homeowners to save thousands of dollars by refinancing at today’s low interest rates,” the White House statement said.

Borrowers are expected to save an average of $3,000 a year from the refinance initiative, while the lenders will pick up the estimated $5 billion to $10 billion tab for program costs.

“This cost will be fully offset by using a portion of the president’s proposed Financial Crisis Responsibility Fee, which imposes a fee on the largest financial institutions based on their size and the riskiness of their activities — ensuring that the program does not add a dime to the deficit,” the White House explained.

In order to avoid putting FHA’s Mutual Mortgage Insurance fund at risk, a separate fund would be created for the streamline refinance program.

For FHA mortgagees who are wary of streamline refinances because their FHA approval could be compromised, the housing agency is removing streamlined refinances from its compare ratio.

The president also outlined a proposal for legislation that would further streamline the refinance process for borrowers whose loans are owned or guaranteed by Fannie or Freddie. That plan calls for the elimination of appraisal costs on HARP loans through mark-to-market accounting and other alternatives when automated valuation models won’t work.

To increase lender participation and boost competition, the administration proposes to require the same streamlined underwriting for new Fannie and Freddie servicers as they do for the current servicers of the loans.

While HARP is limited to borrowers with little or no equity, Obama proposes to extend the program to borrowers with significant equity.

Borrowers refinancing through HARP or FHA will have the option of choosing a lower payment or a shorter 20-year term that will help negative-equity borrowers achieve a positive equity position within five years. Borrowers who choose the shorter terms will have their closing costs paid by Fannie, Freddie or FHA — a move that will save an average of $3,000.

The proposal also calls for the streamlining of Department of Agriculture refinances on rural properties through USDA.

In addition to the refinance programs, Obama outlined several other initiatives to strengthen the U.S. housing market.

One of those programs will convert real-estate-owned properties into rentals.

Another plan calls for a homeowners bill of rights that will provide a simplified mortgage disclosure form, prohibit hidden fees and provide guidelines that prevent conflicts of interest.

The Consumer Mortgage Coalition released a statement indicating that it was “very pleased that the president is so committed to simplifying mortgage disclosures.” But the group criticized the current efforts by the Consumer Financial Protection Bureau, which provided drafts of a new disclosure that doesn’t work with existing disclosure rules.

“Without federal preemption, there will continue to be a myriad of different disclosure requirements, thereby defeating our mutual goal of streamlined and simplified disclosures,” the coalition stated. “It is important to note that many of the disclosure requirements at the state and local level often require the same information to be disclosed, but just in a slightly different format.”

The bill of rights would additionally include replacing the existing patchwork of mortgage regulations with a single set of federal lending standards.

“As we have learned over the past few years, the nation is not well served by the inconsistent patchwork of standards in place today, which fails to provide the needed support for both homeowners and investors,” the statement said. “The administration believes that there should be one set of rules that borrowers and lenders alike can follow.”

In a statement, Mortgage Bankers Association President and Chief Executive Officer David H. Stevens said that the Washington, D.C.-based trade group supports a single national set of standards. He noted that such standards could help provide confidence and certainty in the real estate market for borrowers, lenders and servicers alike.

Obama also discussed servicer requirements for the foreclosure process and said he will propose in his budget $15 billion to go towards a national effort to put construction workers back to work rehabilitating and refurbishing hundreds of thousands of vacant and foreclosed homes and businesses.

The programs were first laid out by Obama in his state of the union address.

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