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November 16, 2011 12:09 am
Fannie Mae and Freddie Mac, the government-backed mortgage guarantors, said on Tuesday that they would reduce fees and relieve lenders from some liability on home loans as part of a scheme to lower the cost of borrowing to distressed homeowners.
The Obama administration has revamped the home affordable mortgage programme (Harp) in a bid to make it easier for borrowers to refinance at lower rates. As part of the new guidelines, Fannie and Freddie have agreed not to demand banks compensate them for loans that later prove to have breached underwriting guidelines.
Lender liability for underwriting mistakes made by the originators of the original loan has been one of the biggest obstacles to increased refinancings under the Harp initiative. Fannie Mae, in its revised guidelines, said: “The lender is not responsible for any of the representations and warranties associated with the original loan.”
But, separately, American International Group, the insurer that is majority-owned by the US Treasury, is refusing to waive its right to pursue mortgage servicers for misrepresenting the quality of loans in a stance that could be a barrier to the latest effort from the Obama administration to lower the cost of mortgages.
United Guaranty, an AIG subsidiary that sells mortgage insurance to lenders, is taking a different stance from rivals by saying it will not give up its right to cancel insurance protection if mortgage lenders are found to have made errors in underwriting loans made under Harp.
AIG said United Guaranty supported Harp and had insured $3.4bn of loans made under the programme since it was created two years ago but surrendering legal rights over bad loans would constitute a “back door bail-out” to the banks.
“The real issue here is that some of the lenders with fraudulent or poorly documented or undocumented mortgages want to use the Harp programme to relieve themselves of the risk tied to their bad lending decisions,” said an AIG spokesman. “They want us to surrender our legal protections against fraud.” The AIG stance was first reported by Bloomberg.
Mortgage Insurance Companies of America, which represents the main mortgage insurers other than AIG, said last month that “to advance the reach of the programme” its members would “relieve lending institutions of representations from the original loan files”.
In spite of record-low mortgage rates many borrowers are too far “underwater” on their loans – with debt exceeding the value of their homes – to take advantage. The Obama administration has tried to remove barriers to homeowners’ refinancing.
The Treasury, which has a 77 per cent stake in AIG as a result of 2008’s bail-out of the company, declined to comment. People familiar with the situation said it had not intervened in the policy decision.
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