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CFPB analyzes impact of rising interest rates on borrowers
On November 30, the CFPB’s Office of Research published a blog post regarding the recent increase of mortgage interest rates. The Bureau combined the quarterly data of 55 financial institutions reporting mortgage activities for the first and second quarters of 2022 with annual data from past years. The Bureau limited the analyses to closed-end home-purchase loans secured by site-built, single-family, and first-lien principal residences, and excluded reverse mortgage loans from its analysis. Among other things, the Bureau found that after two years of decline, the mortgage interest rate began rising in 2021, with a sharp increase in 2022. The Bureau explained that a “direct consequence of higher interest rates is the higher monthly payments borne by borrowers,” and that “though monthly payment information is not reported in HMDA data, using the reported loan amount, loan term and interest rate, [the Bureau] can impute the monthly principal and interest payment of loans at origination.” The Bureau also reported that Hispanic white and Black borrowers reached new debt burden levels, specifically the average debt-to-income (DTI) ratio for Hispanic white borrowers reached over 40 percent, while the average DTI for Black borrowers rose to 39.4 percent. The Bureau noted that increasing interest rates could also affect whether consumers qualify for mortgage loans. For many mortgage applicants who are on the margin of qualifying, the higher projected DTI could potentially lead to their applications being rejected. Compared to 2021, DTI has become more likely to be reported as a denial reason for denied Black, Hispanic white and non-Hispanic white applications in 2022. Indeed, by the end of the second quarter of 2022, the Bureau reported that over 45 percent of all Black and Hispanic white applicants who were denied had DTI reported as a denial reason.
CFPB seeks comments on mortgage refinance and forbearance standards
On September 27, the CFPB issued a notice in the Federal Register requesting input from the public regarding (i) the availability of refinance loans for borrowers with smaller mortgage loan balances, and (ii) options for mortgage forbearance. Specifically, the Bureau sought ways to: (i) “facilitate mortgage refinances for consumers who would benefit from refinancing, especially consumers with smaller loan balances”; and (ii) “reduce risks for consumers who experience disruptions in their financial situation that could interfere with their ability to remain current on their mortgage payments.” The Bureau also noted that some stakeholders have suggested that changes to the Bureau’s ability-to-repay/qualified mortgage rule (ATR–QM rule) may play a role in facilitating beneficial refinances through targeted and streamlined programs, noting that the current rule references “frictions” in the refinance process tied to QM standards. Comments are due by November 28.
CFPB seeks better refi, loss-mitigation options
On September 22, the CFPB issued a request for information (RFI) regarding ways to improve mortgage refinances for homeowners and how to support automatic short-term and long-term loss mitigation assistance for homeowners who experience financial disruptions. According to the Bureau, refinancing volume has decreased almost 70 percent from last year as interest rates have risen. Additionally, periods of economic turmoil, such as the Covid-19 pandemic, can pose significant challenges for mortgage borrowers, the Bureau noted. Throughout the pandemic, 8.2 million borrowers entered a forbearance program, and as of July 2022, 93 percent have exited. Of those who have exited forbearance, five percent are delinquent or in active foreclosure. The Bureau is interested in the features of pandemic-related forbearance programs that should be made more generally available to borrowers. Specifically, the RFI requests information regarding, among other things: (i) targeted and streamlined refinance programs; (ii) innovative refinancing products; and (iii) automatic forbearance and long-term loss mitigation assistance. Comments are due 60 days after publication in the Federal Register.
FHFA makes GSE desktop appraisals permanent, expands refinance programs for LMI borrowers
On October 18, FHFA announced two measures to advance housing sustainability and affordability. Speaking before the 2021 Mortgage Bankers Association Annual Convention and Expo, acting Director Sandra Thompson announced that Fannie Mae and Freddie Mac (GSEs) “will incorporate desktop appraisals into their guides for many new purchase loans starting in early 2022.” Thompson explained that including desktop appraisals in the selling guides will change what was a temporary flexibility into an option that will “mitigate risk for use over the long-term” and will “become an established option for originating [GSE] loans.” According to Thompson, this certainty should allow lenders, borrowers, and appraisers to take advantage of efficiency gains provided through desktop appraisals.
Thompson also announced that the GSEs will expand their refinance programs for low- and moderate-income borrowers that were introduced last year. Several enhancements will be made to the RefiNow and RefiPossible programs to expand eligibility requirements and make the programs easier for lenders to offer. Thompson noted that income threshold for eligible borrowers will be raised from 80 percent of area median income to 100 percent. Additionally, the GSEs are making other modifications to reduce operational frictions for lenders.
FHA issues underwriting guidelines on prior forbearances
On September 10, FHA released Mortgagee Letter 2020-30, which discusses FHA’s underwriting guidelines for mortgages involving borrowers who were previously granted a forbearance. The letter notes that FHA is “expanding its underwriting guidelines” to address situations in which borrowers are seeking new FHA insured financing after being granted a forbearance, due to either a Presidentially Declared major disaster or some other hardship, including the Covid-19 pandemic. The letter specifies that a borrower will be eligible for a new FHA insured mortgage after being granted a forbearance if, among other things, (i) the borrower continued to make regularly scheduled payments and the forbearance plan is terminated; or (ii) for cash-out refinances, the borrower has completed the forbearance and has subsequently made 12 consecutive monthly payments; or (iii) for purchases and no cash-out refinances, the borrower has completed the forbearance and has subsequently made at least three consecutive monthly payments; or (iv) for “Credit Qualifying Streamline” refinances, the borrower has completed the forbearance and has subsequently made less than three consecutive monthly payments; and (v) for all “Streamline refinance” transactions, the borrower has made at least six payments on the FHA insured mortgage being refinanced.
FHA requires the new underwriting guidelines be implemented for all case numbers assigned on or after November 9.
FHFA delays implementation of new refinance fee
On August 25, FHFA announced that it will delay implementation of Fannie Mae and Freddie Mac’s new adverse market refinance fee until December 1. As previously covered by InfoBytes, the adverse market refinance fee of 50 basis points, or 0.5 percent, was originally slated to apply to certain refinance mortgages with settlement dates on or after September 1. FHFA received significant pushback regarding the fee, including concerns about its expedited implementation period, and lack of information regarding the market conditions that would be addressed by the change (see InfoBytes coverage here). In the new announcement, FHFA states that the fee is “necessary to cover projected COVID-19 losses of at least $6 billion at the Enterprises,” noting that $6 billion is the “conservatively projected” cost of actions taken to protect renters and borrowers based on (i) “$4 billion in loan losses due to projected forbearance defaults”; (ii) “$1 billion in foreclosure moratorium losses”; and (iii) “$1 billion in servicer compensation and other forbearance expenses.”
Senators question FHFA on adverse market refinance fee
On August 19, a group of Democratic Senators wrote to FHFA Director Mark Calabria expressing concern over the newly announced adverse market refinance fee of 50 basis points, or 0.5 percent, on certain refinance mortgages (covered by InfoBytes here). The letter acknowledges that throughout the Covid-19 pandemic, Fannie Mae and Freddie Mac (GSEs) “have adopted policies to ease purchase and most refinance transactions,” to assist homeowners. However, the new refinance fee “that will be implemented just three weeks after it was announced” was a “surprise to see,” according to the letter. The senators stress that the new fee “will shift more of a financial burden to consumers,” which would contradict the GSEs’ purpose of providing stability in the secondary mortgage market.
The letter follows an August 14 letter from the Chair of the Senate Banking Committee, Mike Crapo (R-ID), which expresses similar concern for consumers but also notes that the short window before the effective date can complicate the refinance process for current buyers and negatively impact community lenders who already have closed loans that cannot be delivered before September 1.
Both letters request Calabria provide more information on the policy change, including details regarding the market conditions that would be addressed by the fee and how the fee amount was determined.
Fannie and Freddie announce new refinance fee
On August 12, Fannie Mae and Freddie Mac announced a new adverse market refinance fee of 50 basis points, or 0.5 percent, on certain refinance mortgages. According to Freddie Mac’s Guide Bulletin 2020-32, the refinance fee applies to cash-out and no cash-out refinance mortgages “except for Construction Conversion Mortgages that qualify for single-closing Interim Construction Financing and Permanent Financing.” The Bulletin notes that the fee is a result of economic and market uncertainty due to the Covid-19 pandemic. Fannie Mae’s Lender Letter LL-2020-12 notes that the new fee applies to limited cash-out refinances and cash-out refinances but provides a limited exception for certain single-closing construction-to-permanent loans.
The new fee is effective for applicable refinance mortgages with settlement dates on or after September 1.
VA issues lender guidance on Covid-19
On June 30, the Department of Veterans Affairs issued Circular 26-20-25 (and subsequently issued Circular 26-20-25, Change 1), which provides guidance on the impact of the CARES Act foreclosure protections on VA-guaranteed purchase and refinance transactions. The circular states that for purchase and cash-out refinance loans, the “VA will not consider a Veteran as an unsatisfactory credit risk, based solely upon the fact that the Veteran received some type of credit forbearance or experienced some type of deferred payment during the COVID-19 national emergency.” With regard to Interest Rate Reduction Refinance Loans (IRRRL), the Circular notes that the VA is waiving certain prior approval requirements for delinquent loans if (i) the lender is approved to close loans on an automatic basis; (ii) the loan being refinanced is under CARES Act forbearance protections; (iii) the borrower is no longer experiencing the financial hardship caused by the Covid-19 pandemic; and (iv) the borrower qualifies for other IRRRL credit standards. Moreover, the Circular details additional IRRRL considerations for lenders, including maximum loan amounts, loan seasoning, and valuation requirements. Lastly, the Circular encourages lenders to waive origination fees and consider discount points and premium pricing offsets for veterans impacted by the Covid-19 pandemic.
Fannie and Freddie: Borrowers eligible for refinance or purchase while in forbearance
On May 19, the FHFA announced that Fannie Mae and Freddie Mac issued temporary guidance that would allow borrowers who are in forbearance, or have recently ended forbearance, to be eligible to refinance or purchase a new home. According to Fannie Mae Lender Letter LL-2020-03 and Freddie Mac Bulletin 2020-17, borrowers are eligible to purchase a new home or refinance their mortgage if they are current on their mortgage—defined as having “made all mortgage payments due in the month prior to the note date of the new loan transaction by no later than the last business day of that month”—or if the mortgage is currently in a loss mitigation solution (the borrower must have made at least three timely payments as of the note date of the new transaction). Lenders are required to apply the guidance to loans with application dates on or after June 2, but may apply them immediately.
On the same day, Fannie Mae also issued an update to LL-2020-06, which extends the effective date for eligible loans in forbearance due to a Covid-19 hardship to June 30 with delivery to Fannie Mae by August 31.