Fannie relaxes rules for refinancing mortgages
By JEFF LAZERSON / CONTRIBUTING COLUMNIST
I’m so excited! I can’t even sit still because Fannie Mae made a bombshell announcement this week: Allowing zero skin-in-the-game for a new title holder to gain homeownership via a refinance transaction. Oh my Goodness!
Here’s the brief history. In December 2007, during the mortgage crisis, Fannie Mae mandated something called continuity of obligation. Simply stated, Fannie Mae largely required a new borrower to be on title for at least six months before a rate and term refinance took place or 24 months for an unrestricted cash-out refinance.
There were exceptions to this 2007 rule like divorce settlements and inheritances.
Absent that seasoning, at least one of the existing mortgagors had to remain on title and be on the new loan if a borrower was being added. That’s because a lot of purchase shenanigans were cropping up, disguised as refinances during the meltdown days.
According to this week’s Fannie Mae bulletin eliminating continuity of obligation in its entirety, this previous rule was to insure that a borrower or borrowers who acquired ownership absent of a recorded sale were properly qualified.
Now you can add anyone to title and take the existing title holders off. The new title holder can immediately qualify to refinance the existing mortgage debt for owner-occupied or rental property so long as minimal equity requirements are met, verified by an appraisal. The mortgage obligation for the previous borrower goes away just like that.
In the case of a cash-out refinance, there is a six month title seasoning requirement for any acquired property before the cash-out refinance can take place.
“(Fannie Mae) has no minimal contribution now from a borrowers own funds on a purchase,” said Jude Landis, credit policy vice president at Fannie Mae. Her point was that this new policy creates an equivalent no borrower contribution on refinancing as well.
Landis pointed out that the existing security instrument (note) requires borrowers to notify their existing lender of changes to the title. “It’s the prerogative of the servicer to use due diligence and discretion (whether to accept these changes or not),” added Fannie spokesman Pete Bakel.
In my 30 years as a mortgage broker, I have never heard of any borrower notifying the servicing lender, much less the lender imposing its acceleration agreement or due on sale clause over any title changes.
Even if the lender objected to the title change, the new title holders would likely apply to a new lender, not the existing servicing lender. Nothing in this updated rule restricts any new lender from funding this loan.
The beauty of this new policy is it will expand homeownership for more would-be buyers who didn’t have down payment funds. Be it mom and dad or anyone else who wants to help out, here’s another desperately needed door to ownership.
Relationships of the parties are a non-starter. Landis points out that no relationship is required by Fannie on a down payment gift now. Bakel said, “It’s not for us to determine.”
What about straw buyers? What about fraudsters like existing borrowers who can’t qualify due to income or credit? The owner could get someone else to take title and take out a better loan. Holy Toledo!
While Freddie Mac does not call it continuity of obligation, Freddie does have similar rules, which are not changing, according to Freddie Mac spokesperson Brad German.
Don’t be surprised if the National Association of Realtors comes out with a boycott Fannie Mae or an “I love Freddie Mac” bumper sticker.
Jeff Lazerson - Mortgage Columnist since 2011