105% Refinancing With No PMI (Maybe) (NOW UP TO 125%)

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Yes, it sounds like a scam to me, too. But it's real.

This isn't to say that there are scammers out there promising the same thing. But there is a legitimate program that accomplishes this. Actually, there are no fewer than six such legitimate programs - three from Fannie Mae, three from Freddie Mac, all sourced in the Help For Homeowners Program. I don't think it's going to help a large number of people, but I'm going to talk about it in order to help the ones it does help separate fact from fiction.

There are technical differences in the programs, governing the relationship of your current loan servicer and the loan originator you apply for the refinance with. But the programs are essentially similar, and use the same rate structure. Which of these three programs you apply for makes no difference to whether a consumer qualifies, or the rate cost tradeoffs offered by a particular mortgage originator. What's that they say about a difference that makes no difference?

It doesn't really matter who you choose to refinance with, or which of the three programs you end up with - the rate structure is the same. So if you do qualify, shop normally for the best loan for you. You don't get any discounts or preferences by going through the same loan servicer you currently have - but the deals that are being offered are very different from originator to originator. Yes, different programs, but same underlying rate structure and your loan ends up being owned by the same people. The only difference is the tradeoff between rate and cost that a given provider offers. In short, if someone offers you a better deal and is willing to stand behind their quotes with something real, there is no rational reason not to do business with them. Ask prospective loan providers all the same questions and see which one is the best.

No matter which of these programs you apply for, they have the following restrictions in common

First, your loan must be currently held by Fannie Mae or Freddie Mac or underwritten to Fannie/Freddie Standards. This means you have to have qualified by their standards originally - these programs will not help or refinance people who got subprime loans! They will ask privacy act questions (Freddie Mac more so than Fannie Mae), so I'm including these links for convenience - use them at your own risk.

Does Fannie Mae Own Your Loan?

Does Freddie Mac Own Your Loan?

Alternatively, you can run a search for the two websites through the search engine of your choice, and find these exact pages through the main webpage of the respective government corporation. They're each one click from the main webpage, although the correct Fannie link is a bit more difficult to spot than the Freddie one.

Second, the original application can have contained no misrepresentations or fraud. This restriction essentially eliminates folks who qualified via stated income procedures. If you could have documented the income to qualify, why didn't you? In every case, it would have gotten you a better rate or a lower cost for that rate. The reason people got stated income loans is that they couldn't.

Third, you must qualify normally for the refinance with one exception. Debt to Income Ratio has to be satisfied normally and, practically speaking, the automated underwriting program has to accept your loan. The only requirement that has been relaxed is Loan to Value Ratio. This isn't a charity program; it's loss mitigation for Fannie and Freddie. They're not just throwing taxpayer money at a problem - these programs are intended to keep them from losing money by enabling people who would qualify for a new loan if values hadn't receded so much and keeping them in their home rather than going through the foreclosure process and saturating the market and causing still more waves of this. A thoroughly intelligent business alternative for the lenders - much the same reason the lenders finally got serious about loan modification last summer. But individual banks couldn't offer refinancing programs of this nature unless they wanted to become portfolio lenders, which most of them don't and can't. It had to be the underlying investors that offered these programs, something Wall Street is loath to do but Fannie and Freddie can be instructed to do by the federal government.

Fourth, there are potentially issues with loan subordination. Lots of folks got a first mortgage for 80% of the value of their home through Fannie or Freddie, with a balance of up to 20% of the value on the property through a second mortgage. Alternatively, if they did put the full twenty percent down, they got an equity loan in order to take cash out at some later time. If you have a second mortgage and refinance your current first, the second mortgage automatically slides up to first secured position, and your new loan would take second place. That's not acceptable to Fannie or Freddie, and for good reason. So if you do have a second mortgage, the holder of that second mortgage must to agree to subordinate to your new loan in order to be acceptable to Fannie or Freddie. Fannie and Freddie are not allowed to pay off second mortgages under these programs - that's not a risk they have currently taken; they're not going to throw even more money at the program and take more risk. As I said, this isn't charity, this is loss mitigation. Some second mortgage holders may not agree to subordinate. There is nothing that can be done to force them. All you can do is explain why it is in their best interest and hope they see reason. Some second mortgage holders may demand conditions upon their subordination and you must satisfy those conditions to get them to agree to subordinate. One condition that I would expect to get is that the balance on the first mortgage not increase, which means you have to pay closing costs out of pocket if you do have a second mortgage - no rolling them into the balance of your new mortgage.

I need to take a moment here to explicitly state: the 105% maximum loan to value ratio applies to the first mortgage only. It's fine under these programs if there's a second that sends the comprehensive loan to value ratio (or CLTV) above 105% - so long as the holder of that second mortgage agrees to subordinate.

Finally, there are PMI issues. It isn't necessarily that there is no PMI. What is the case is that Fannie and Freddie will allow your current PMI status to continue. What this means is that if you're not paying PMI currently, your new loan will not have a new PMI requirement imposed. If you are paying PMI currently, the current PMI provider must agree to continue the status quo (mostly they will; insurance companies aren't idiots and they're mostly not constrained by regulations that didn't forsee this situation). For example, let's say your loan was originally funded as a ninety percent loan to value purchase money loan. Such a loan would have had PMI in some form, either regular or lender paid. If your value went up at some point and your PMI requirement was removed due to a loan to value ratio that was below eighty percent, there will be no PMI on your refinanced loan. If your PMI is still in effect, it would need to be carried over from the existing loan to the new loan, but it would not be increased if the current situation was less favorable than the original situation. Normally, if you were now in a ninety-five or one hundred percent or even above 100% loan to value situation (as many people whose values have declined would be), the risk to the PMI provider would increase, and therefore they would charge more money in order to undertake that risk. That is not the case with these special programs. The PMI providers are already on the hook for these losses; again, this is a way that might mean they don't have to lose that money. If they're smart, they will accept the risk of transferring the existing PMI to the new loan. As I said earlier, these are insurance companies, not securitized lenders or investors subject to Federal Reserve and SEC rules. Mostly, they are smart, and therefore willing and able to accept the change. They may impose conditions of their own, like the balance not increasing by more than a certain amount, but mostly they are likely to accept the risk.

Finally, to re-emphasize, if there is currently no PMI on your loan, there will be no PMI required on the new loans under these programs, even though Fannie and Freddie and every other lender in the country would normally require PMI with a first mortgage with over an eighty percent loan to value ratio. The reason why this would normally be so has to do with Federal Reserve regulations - but with the Federal Government basically owning Fannie and Freddie now, and the Federal Reserve having its own reasons for wanting to help clean up this mess, regulations can get modified or exceptions.

One other word of caution: The better your credit score, the better your payment record, the better your loan to value ratio, the better the loan you can expect to receive. Someone with a 780 credit score and an eighty-two percent loan to value ratio can expect a better loan (lower rate/cost tradeoff) than someone with a 620 credit score and a 104% loan to value ratio. Those who have been more responsible will get something better than those who have been less responsible. But these loans do actually stand a decent chance of helping someone who needs it, providing they're in the group that's been targeted by the program

As I said, I don't really expect these programs to help a large percentage of the people in trouble, but even a small percentage of many millions is tens to hundreds of thousands, and I am certainly not opposed to these programs helping those people they can help. These programs are not charity; they have been put into place with a rational, ruthless eye towards Fannie and Freddie not losing money they would otherwise lose if they hadn't undertaken these programs. If they will potentially help you, start contacting loan originators and asking about Fannie and Freddie's new 105% loan refinancing programs. Even I'm not certain about all of the various program names (I only care about the ones I can do - but as I said at the beginning of the article, which of these programs you apply for is irrelevant to the consumer - only Fannie and Freddie really care about the differences between their three programs each, because the rate structures are the same, the qualifications are the same, etcetera. Doesn't matter whether you apply through your current loan servicer, another lender, a broker, or a correspondent - shop for the best deal and the best loan for you and your situation). Loan originators will know what you're talking about, and applications are now being accepted for these programs.

Caveat Emptor

Disclaimer: Yes, I will be doing these loans under the programs aimed at broker and correspondent originators.

UPDATE (7/6/2009): This program has been successful for those it covers, to the point where Fannie Mae and Freddie Mac are going to expand the maximum Loan to Value Ratio to 125% within the next month. I think that will have much more effect upon the market, and make far more people eligible.

Article UPDATED here


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Joe Golisano said:

Nice article- I'm one who benefits from this program. There is one item worth noting however:

Fannie Mae does NOT require that you refinance thru your "original loan provider".

Freddie Mac DOES! My case being the latter, I'm restricted from shopping around for the best APR%

... why can't these guys just keep it simple and follow the same set of rules?

DM: Why you should Ignore APR


And even Freddie lets you shop via brokers and correspondent lenders. The loan just has to be placed with the current servicer.

Pat McDonald said:

Yes, excellent article. I, too, am one who (allegedly) could take advantage of the Freddie Mac program. However, my mortgage-holder, Bank of America, called yesterday and said that I will be put on a 60-day waiting list (today is May 13) for phase II of the program. This is after about two months of phone calls that began March 31.

The reason for the waiting list? Bank of America says that I have PMI even though all my loan papers and even my current/2008 Mortgage Interest Statement indicates "$.00" paid for private mortgage insurance. I, too, wish the rules were the same and that other lenders or brokers could help with the refinance. Seems to be a "bait and switch" or a matter of semantics or simply the BofA method to keep some people (like myself who have a very high FICO, good income, full-time job, no late payments) from benefitting.

Dan Melson Author Profile Page said:

You might try a broker or correspondent that works with your lender/servicer. I would need to double check program guidelines, but I believe as long as the loan ends up with your current servicer, Freddie doesn't care. Fannie's being a lot more intelligent about this, and is likely to see far more benefit.

Mike Greenwalt said:

My current loan is purchased by Freddie Mac, via USAA. Interestingly enough, shortly before this program was activated, I attempted to refinance through USAA on my own accord. Ultimately this did not go through becasue the value of my home had dropped considerably and was placing me above the 90% LTV limits in place at USAA. (I am about 92%)

After learning about the program and seeing that it had since "gone live" I attempt to refinance through USAA. Not only is there a high level of confusion on their end regarding the participation levels of Freddie Mac in this program, USAA again ultimately came back and said that because I was carrying PMI on my previous loan I was not eligble to take advantage of the full "up to 105%" LTV and would only be allowed to qualify at levels of 90% at better, as such may application was again rejected.

I am a little confused because I am seemingly not realizing any benefit of this program designed to help people refinance who have had a drop in value of their home. My LTV limit was 90% before the program and it is still at 90% after the program. Nothing changed.

Does anyone have thoughts on this or can explain what I am missing?

Note: I am tempted to believe that the advisors I spoke with at USAA just don't understand the full plan because they have been givening me a lot of mixed sometimes contradictory information. Sometimes it is flat wrong. For instance the first time I called one rep told me I don't qualify for the the refinancing program because I carry PMI and it is for individuals who do not carry PMI. This was flat out not true.

Dan Melson Author Profile Page said:

Once again, that's a problem with the situation. Unfortunately, Freddie requires the loan to go through their current servicer. When there is PMI active, even Fannie does.

What can you do? Try finding a different rep (or channel) if you can. Instead of calling the toll free number, go into a branch, or vice versa. Or, I believe broker/correspondents can do Freddie loans so long as it goes through current servicer.

Brian said:

Excellent article. I enjoyed your insight into the reasoning behind why this program exists. I'm happy to say I do qualify and currently do not pay PMI so I plan on closing with Bank of America (they took over my Countrywide mortgage) in July.

I tired refinancing with another bank but my house has dropped 10% in value since I bought it 17 months ago so they wanted PMI.

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This page contains a single entry by Dan Melson published on April 27, 2009 7:00 AM.

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