One of the key provisions to the HARP 2.0 revisions was eliminating the LTV ratio limits that restricted a huge swath of underwater homeowners from refinancing their mortgages; it would appear that Fannie Mae has taken it one step further.
Under a new rule researched by Barclays and reported by HousingWire, lenders are no longer required to assess the borrowers ability to repay their refinanced loan when operating under Fannie’s HARP channel.
The change, Barclays said, is the result of an internal review by Fannie that discovered a large number of borrowers were unable to refinance because of a “borrower ability to pay” clause.
Interestingly, it was the lenders, not the borrowers, who advocated for a change to the rule, Barclays reported.
“Lenders argue that lack of clarity on what reasonable ability precisely means could expose lenders to indemnification liability in the event that the loan defaults,” Barclays wrote in its report. “Though the GSEs (government-sponsored enterprises) have indicated that this clause exists to ensure prudent underwriting judgment and efficient choice between HARP and HAMP, lenders view this as a significant risk.”
Now, refinancings will be determined primarily by the borrower’s credit rating, based on the number of payments he or she has been on the loan, as well as income.
As HousingWire reports: “Under the changes, the ability-to-pay clause is no longer considered an underwriting requirement for Fannie’s HARP 2.0 program. Instead, Fannie Mae now stipulates that no debt-to-income calculation is required for these refinancings as long as the borrower’s payment does not increase by more than 20 percent.”
Now, with that clause removed, Barclays reports that lenders may become more “comfortable” with refinancing, which would boost refinancing activity.