Following an incredible year for refinances that mostly benefited wealthier borrowers, the Federal House Finance Agency announced it is implementing a new refi product that targets low-income borrowers with single-family mortgages backed by Fannie Mae and Freddie Mac. According to the regulatory agency, this new product will assist borrowers who were less likely to take advantage of 2020’s historically low rates.
Under the new refi option, lenders must ensure that the borrower saves at least $50 a month in their mortgage payments while simultaneously dropping their interest rate by at least 50 basis points. For example, this could potentially knock an already historically great rate such as 3.5% down to 3% with the new product.
The FHFA will also require that lenders provide a maximum $500 credit for an appraisal if the borrower is not eligible for an appraisal waiver. The GSEs will reimburse the lender once the loan is sold to them.
“We look forward to implementing Fannie Mae’s new RefiNow option as soon as possible to ensure all eligible homeowners are able to avail themselves of this money saving opportunity,” Fannie Mae’s CEO, Hugh Frater, said in a statement.
As part of the RefiNow program, the FHFA will also waive its controversial adverse market refinance fee for borrowers with loan balances at or below $300,000. The 50 basis point fee was originally implemented in December of 2020 as a means of “risk management” given the high level of production lenders saw in the pandemic. The fee was met with a flurry of backlash from the industry as it forced the average consumer to pay nearly $1,400 more than they otherwise would have paid.
Now, the FHFA said the new refi option could save borrowers an average of between $100 and $250 a month.
“Last year saw a spike in refinances, but more than 2 million low- income families did not take advantage of the record low mortgage rates by refinancing,” said FHFA Director Mark Calabria. “This new refinance option is designed to help eligible borrowers who have not already refinanced save between $1,200 and $3,000 a year on their mortgage payment.”
To qualify for this option, beyond owning a GSE-backed mortgage, a borrower must have an income at or below 80% of the area’s median income and have been current of their payments for the last six-months, with no more than one payment missed in the last 12. Borrowers must also not have a mortgage with an LTV ratio greater than 97% and a DTI no higher than 65%. Lastly, borrowers must have a FICO score no lower than 620.
The FHFA said it plans to make this product available to eligible borrowers as soon as possible, with a tentative date beginning this summer.
This latest option may be a strategic play by the GSE’s given that rising mortgage rates are expected to deter a number of borrowers from the refi market. With more options comes more volume as Fannie Mae’s economic and strategic research group estimated refinance origination volumes in 2022 to total $1.1 trillion, a 48% decline from 2021 and a $40 billion downward revision from last March’s forecast.
“Racial and income disparities in refinance take-up rates have persisted for far too long. With this initiative, we strive to narrow the gap,” Sheila Bair, chairwoman of Fannie Mae’s board, said in a statement. “We thank FHFA for its strong leadership to help all eligible homeowners reduce their monthly housing costs by taking advantage of the historically low mortgage interest rates.”
By Alex Roha