Why are Fannie Mae and Freddie Mac looking to increase refinance rates by 0.5% when refinance loans have been surging for mortgage companies? Interest rates have been at record lows, and lenders have applied stricter qualifying requirements to lower risks due to the uncertainty of the market, yet the agencies are looking to increase the price of Limited cash-out refinance and Cash-out refinance loans up 50 basis points starting December 1.

Letters were distributed to lenders from Fannie Mae and Freddie Mac on August 12 stating the increase was due to the uncertainty of the market and economic risk due to COVID-19.

Recently the long-term viability of LIBOR was undermined due to cases of rate manipulation, low volumes for underlying interbank transactions and the reluctance of panel banks to submit quotes used to calculate LIBOR. As a result, the Alternative Reference Rates Committee has now recommended SOFR as a replacement index for USD LIBOR-indexed contracts.

Let’s take a step back and dissect what this means for the industry, what these products are and what the future looks like. To start let’s talk about what LIBOR products are. LIBOR (London Inter-bank Offered Rate) is an interest rate set in London by major banks. It is an average interest rate (varying from a single day to a 12-month period) estimate of what major banks would be willing to lend to other banks.

Amidst the COVID-19 crisis, the government entities decided to loosen some requirements on various policies. Below are links to website articles, bulletins and resources containing information regarding these policy changes:

Links to FHFA:

FHFA Mortgage Help for Homeowners Impacted by the Coronavirus

FHFA Announces New Mortgage Forbearance Guidelines

With so much in the news regarding Fannie Mae and Freddie Mac potentially ending the conservatorship, I wondered how long Fannie Mae and Freddie Mac have been around. To stimulate my curiosity, I did some quick digging to see how Fannie Mae and Freddie Mac came to be.

To start let’s talk Fannie Mae, also known as the Federal National Mortgage Association (FNMA). Fannie Mae was founded in 1938 by the U.S. government. This was during the Great Depression and the creation of Fannie Mae was part of the New Deal program. With the funds Fannie Mae received from the government, the goal was to have Fannie Mae buy the mortgage loans from private companies and local banks who were struggling financially. With the private companies and banks having more capital and the ability to finance home loans again, the government hoped this would inspire more lending during the economic crisis. 

It’s that time of the year again. On November 26, 2019 the Federal Housing Finance Agency (FHFA) announced the new adjusted 2020 loan limits. With these adjustments, most of the U.S. counties will see an increase, while 43 counties will remain unchanged. Loan limits did not decrease anywhere in the U.S. or its territories.

For Contiguous States, District of Columbia, and Puerto Rico the maximum conforming loan limits for 2020 are as follows:

1-unit     $510,400

2-unit     $653,550

3-unit     $789,950

4-unit     $981,700

FHA has made a change to the Cash-Out Refinance Mortgages that went into effect September 1, 2019, reducing the maximum LTV’s and CLTV’s from 85% to 80%. According to HUD Mortgagee Letter 2019-11sent August 1, 2019, when housing prices are on the rise, the amount of Cash-Out Refinances will soon begin to increase.

Studies have shown a link between increased foreclosures and homeowners having exercised a Cash-Out transaction.  As housing markets begin to decline and homeowners start to realize they have negative equity, they soon find themselves in an unfortunate situation dealing with foreclosure proceedings.