GSEs Ponder Raising Loan-to-value Ratios to Drive More Refinances

July 1, 2009

The regulator of Fannie Mae and Freddie Mac indicated the two government-sponsored entities may gain expanded authority under the Home Affordable Refinance Program to approve mortgages with loan-to-value ratios as high as 125 percent.

James Lockhart, director of the Federal Housing Finance Agency, said the department is considering increasing LTVs “significantly higher than 105 percent.” Lockhart said the current ceiling has kept too many borrowers on the sidelines. The GSEs have refinanced only 80,000 homeowners under the program that the Obama administration has promoted to help borrowers who can’t qualify for a standard refinancing.

The administration unveiled the refinancing program in February and estimated it will refinance at least four million homeowners who have loans that are owned or guaranteed by the government sponsored enterprises. The 105 percent LTV limit theoretically allows Fannie and Freddie to securitize the newly refinanced loans and sell them to the Federal Reserve and other investors. However, raising the LTV might force the GSEs to hold the loans on their books.

“We’re actively considering how to structure a program that makes sense over 105 percent,” Federal Housing Finance Agency Director James Lockhart said, according to Bloomberg. While he said a limit of 125 percent was under consideration, it was “not necessarily the number we’re going to end up with.”