Fannie Mae Permitting 125% LTV Loans: Yikes Or Phew?

Recently, the mortgage agency Fannie Mae (FNM) - the Federal National Mortgage Association - announced that it would be making some changes to its Home Affordable Refinance Program (HARP). FNM has now provided information that permits refinancing of existing Fannie Mae loans with up to 125% loan-to-value (LTV) available for delivery on or after September 1, 2009.

Previously, FNM’s HARP permitted loans up to 105% LTVs. The expansion for eligible borrowers will be through FNM’s Refi Plus manual underwriting option. For loans above 105% LTV, borrowers must refinance into 15-30 year fixed-rate mortgages with the existing servicer.

In addition, for the LTV eligibility expansion, FNM will offer a “special” 50 basis point reduction in the loan-level price adjustment charged for loans with LTVs above 105% and loan terms of 20-25 years. The reduction is intended to incentivize borrowers to select shorter terms and build positive equity in their homes sooner than with a typical 30-year mortgage.

So far, many borrowers have been precluded from being able to refinance due to the substantial declines in property values across the nation. While this modification could prevent borrowers with “good” credit the ability to stay out of foreclosure - a good thing - unless there are significant improvements in the economy and employment trends, this might just push off the potential of the foreclosure process 6-12 months. We are hoping it is the former rather than the latter.

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