FHFA adds refi option for low-income borrowers

WASHINGTON — The Federal Housing Finance Agency is launching a new program to help lower-income homeowners with Fannie Mae- or Freddie Mac-backed mortgages take advantage of rock-bottom rates.

The new refinancing option could save qualifying borrowers an average of between $100 and $250 a month, the FHFA said.

The program will be available to single-family borrowers who only make 80% of their area's median income or less. To qualify, borrowers must not have missed a mortgage payment in the last six months or missed more than one payment in the last year.

Qualifying homeowners must also have a credit score of at least 620. They cannot have a debt-to-income ratio that is higher than 65% or a loan-to-value ratio that is higher than 97%.

Bloomberg News

“Last year saw a spike in refinances, but more than 2 million low-income families did not take advantage of the record low mortgage rates by refinancing,” FHFA Director Mark Calabria said in a news release. “This new refinance option is designed to help eligible borrowers who have not already refinanced save between $1,200 and $3,000 a year on their mortgage payment.”

The refinance program will require lenders to offer at least $50 in savings to borrowers on their monthly mortgage payments and a reduction of at least 0.5% in the loan’s interest rate. Lenders will also be able to provide a $500 credit for an appraisal.

Through the new option, lenders can also skip a 50-basis-point fee required by the FHFA that is designed to protect Fannie and Freddie from crisis-related losses. In the program announced Wednesday, that fee is waived for borrowers wanting to refinance if their loan balance is below $300,000. The government-sponsored enterprises began charging the adverse market refinance fee in December in light of the economic uncertainty caused by the coronavirus pandemic.

In 2020, the 30-year fixed mortgage rate averaged about 3.1% according to Freddie Mac, a 90-basis-point drop from the previous year. That ignited a wave of refinancing as borrowers looked to lower their monthly mortgage payments.

But many borrowers didn’t meet the qualifications to refinance, which include a minimum 720 credit score or at least 20% equity in a home, according to Black Knight, a mortgage and real estate data and analytics firm.

Still, mortgage rates are expected to tick up this year, and refi applications are already 20% lower than they were last year, meaning lower-income borrowers may not be able to benefit from the program as much as they could have last year.

The Mortgage Bankers Association this month reported a rebound in refi activity as mortgage rates dipped, but most industry observers are expecting a slowdown.

The FHFA said the refi program for lower-income homeowners will be offered starting this summer.

Fannie Mae, which is calling the program RefiNow, said it hopes the new option can help close the gap in racial and income disparities among those who seek to refinance.

“We look forward to implementing ... [the program] as soon as possible to ensure all eligible homeowners are able to avail themselves of this money saving opportunity,” Fannie CEO said Hugh Frater in a news release.

Freddie Mac said in a news release it is branding the new program as Refi Possible.

“Refi Possible reaches many homeowners who can benefit from refinancing and provides flexibilities that incentivize our clients to serve these eligible borrowers moving forward,” Donna Corley, the head of single-family business at Freddie Mac, said in the release. “Our goal is to expand access to credit responsibly and make sure we are supporting sustainable homeownership.”