Fannie to Tighten Its Rules For Cash-Out Refinancings
September 25, 2002
By PATRICK BARTA ANDJohn D. McKinnon
Staff Reporter of THE WALL STREET JOURNAL
In a move that could take some wind out of the mortgage-refinancing
boom, and thus the economy, Fannie Mae has told lenders it is tightening
standards on cash-out loans. Internal research indicated some of the loans
were defaulting at higher rates than other mortgages.
The changes, for now, are minor. But they do coincide with growing
uneasiness in the financial world over the performance of all mortgage
loans, which have experienced higher delinquencies and rising foreclosures
this year amid a struggling economy. The economy has become
increasingly dependent on the housing market, and cash-out refinancings in
particular, to help prop up consumer spending. Economists say money
from cash-out refinance mortgages will add billions of dollars in spending
to the economy this year by allowing consumers to tap equity they have
gained from rising home prices.
The changes, effective Feb. 1,
2003, affect only those loans
that are bought or securitized
by Fannie Mae, a government-sponsored company that helps the mortgage
market by providing capital to lenders. But changes made by Fannie Mae
tend to filter throughout the marketplace, since lenders sell so many of their
loans to the company. And Freddie Mac, the other government-sponsored
mortgage financier, said it, too, is examining cash-out refinance loans.
Some economists applauded the move by Fannie Mae, arguing that
standards have been too loose for some time, and needed to be tightened
now while consumers are in relatively good shape, rather than later. "The
bottom line is that we knew this once-in-a-lifetime opportunity [to
refinance] had to come to an end," says Diane Swonk, the chief economist
at Bank One in Chicago. Tightening now, she says, could prevent the
housing and consumer-spending sectors from getting too overextended,
like the tech sector did during the late 1990s. "If you don't take that last
drink, you don't get as bad a hangover," she says.
With the changes not effective until 2003, Fannie Mae Chief Economist
David Berson said the agency estimates that cash taken from refinancings
will likely be at least as big as last year's $110 billion. Recent survey work
by Fannie Mae indicates that consumers are spending somewhat more than
50% of the cash they take out. The refinancings also could give consumers
an additional $50 billion or so to spend thanks to lower monthly mortgage
payments.
In a letter to lenders earlier this week and posted Tuesday on the Mortgage
Bankers Association of America's Web site (www.mbaa.com), Fannie said
it will begin charging lenders a larger fee for cash-out refinance mortgages
whose loan amounts are between 70% and 85% of the value of the home.
That fee would almost certainly be passed along to consumers through
higher mortgage rates or higher closing costs and in some cases the fee
would total as much as one-half a percentage point of the value of the loan.
For example, on a $100,000 loan, a borrower could pay as much as $500
more than before.
In another change, the company said it will tighten standards for
borrowers, in some cases, who consolidate first and second liens under
one loan. Such loans were previously known to banks as "rate and term
refinance" loans, but will now be considered in some cases as "cash-out
refinances," and would therefore fall under the tighter cash-out refinance
rules.
As a result, "there is going to be a group of people that will get snagged in
the inability to refinance," says Robert Walters, a senior vice president at
Quicken Loans, an online mortgage lender.
In its letter to lenders, Fannie Mae explained that its internal credit-risk
research "confirmed that cash-out refinance mortgages default at a higher
rate than other refinance transactions." The company said the default rates
increased as the borrowers took out substantially larger chunks of equity.
For example, the company said, refinance loans in which borrowers
increased their loan balance by 20% or more from the prior mortgage
balance were three times more likely to default than mortgages with a
balance increase of 3% or less. Fannie Mae regularly analyzes the loans it
underwrites to determine which are performing well, and occasionally
changes underwriting standards to reflect its latest understanding of the
market.
"We've seen some weakening in cash-out refinancings versus other loans,"
too, said Douglas Robinson, a Freddie Mac spokesman. However, he added
that the company isn't currently planning any changes. "We're looking at
the performance of cash-out refinancings as we normally would when an
economy weakens."
Write to Patrick Barta at patrick.barta@wsj.com and John D. McKinnon at john.mckinnon@wsj.com
Updated September 25, 2002 |
