Federal Housing Finance Agency Director James B. Lockhart has sent a letter to Mortgage Insurance Companies of America's executive vice president, Suzanne Hutchinson in which he outlined how the refinance component of President Obama's Homeowner Affordability and Stability Plan (HASP) would affect insurance companies.
The charter governing Freddie Mac and Fannie Mae stipulates that credit enhancement is needed for refinanced loans that carry a loan-to-value ratio (LTV) above 80%. In his letter, Lockhart explained how borrowers with an LTV higher than 80% will be able to refinance without that additional credit enhancement, which is most often provided by private mortgage companies.
The HASP initiative targets borrowers who are current on their mortgages and applies only to mortgages that Fannie Mae and Freddie Mac already hold or guarantee. "Thus, [the government-sponsored enterprises] already hold the credit risk on the mortgage," Lockhart wrote.
"The key characteristic of this initiative is that the borrower need not obtain additional credit enhancement (such as private mortgage insurance) on the refinanced loan in excess of what is already in place for that loan," he continued. "That is, the overall credit exposure of the enterprise would not increase after the refinance. In fact, credit risk would be reduced, because after the refinance, the borrower would have a lower monthly mortgage payment and/or a more stable mortgage payment."
Lockhart's letter also noted limitations placed on refinances under the initiative, which extends through June 10, 2010. Among the limitations cited was the lack of a cash-out component (except for closing costs and certain allowances to cover association fees, property tax bills, etc.).