Lenders Reluctance in Refinancing Underwater Mortgages

Apparently, it looks like it may be almost impossible to get any kind of refinance for mortgage if the amount you owe is greater than what the property is appraised for.

Elizabeth Duke of the Federal Reserve says that mortgage lenders’ concerns of being stuck in the bad loans of someone else are main hindrances to the refinancing of underwater mortgages.

This is one of the main reasons why the Home Affordable Mortgage Program (HARP) of the government has had difficulties in assisting homeowners with very little or below zero equity, added Duke.

The challenge according to Duke is that lenders are worried that if they decide to refinance underwater mortgage via HARP, they might need to purchase back the loan from Freddie Mae or Freddie Mac, the holder and guarantor of the loans, in case it shows that the original underwriting of the loan has problems.

Because of this, they are hesitant to refinance mortgages originally made by another lender even if the current owners of the loans are Fannie Mae and Freddie Mac. Through what is called the putback process, Fannie Mae and Freddie Mac may ask the lenders to purchase back the mortgages that were not underwritten properly. Thus, if the loan is later on refinanced by another lender, it is responsible for it.

This is only one of the four major concerns causing an obstacle to the mortgage refinances of HARP, said Duke. Other problems include pricing on loans that are risk-based that leading to more refinancing cost; hesitance of second lien holders in putting their loans under a refinance mortgage; and rejection of mortgage insurers to new loan’s re-underwriting even if this will lower the default risk.

Duke said that what occurred was the application of mortgage lenders and insurers of the same criteria as that of the new loans in the refinancing of low equity and underwater mortgages.

She added that removing these obstacles to refinancing will help lower the general credit risk of lenders, keep homeowners secured and provide overall support to the economy.

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