U.S. Agency Eases Rules to Expedite, Cut Costs of Refinanced Home Loans

The Federal National Mortgage Assn., the nation’s largest buyer of mortgages, announced new requirements Wednesday that should make it faster and cheaper for homeowners to refinance home loans.

The new rules, expected to become industry standards for refinanced fixed-rate loans, will allow many homeowners to avoid having to get new appraisals or employment and income verifications, thereby shaving as much as one or two weeks and hundreds of dollars from the refinancing process.

The rules are expected to appeal particularly to homeowners refinancing adjustable-rate mortgages into fixed-rate mortgages.

The association, a government chartered shareholder-owned agency better known as Fannie Mae, buys billions of dollars worth of mortgages from lenders, and thus its move will have great influence on lending standards nationwide. Many larger lenders already have streamlined refinancing procedures, but the Fannie Mae action could prompt many more to adopt similar practices.

‘Step in Right Direction’

The moves by Fannie Mae come amid growing evidence of a new surge in refinancing demand as many fixed-rate mortgages are now available at below 10%. Fannie Mae economist David W. Berson said refinancings should account for 25% to 35% of conventional mortgage lending this summer.

The actions taken are designed in part to avoid a crunch in processing of refinancing applications similar to that of 1986 and 1987. Then, a surge in refinancings, along with increased applications for original-purchase mortgages, resulted in some homeowners waiting as long as four to five months to complete refinancing requests.

“We think it’s a good idea,” said Brian Chappelle, a vice president of the Mortgage Bankers Assn., whose members process thousands of refinancing requests nationwide. “It’s not a panacea, but it’s a step in the right direction. It gives lenders the ability to process refinancings more quickly and gives more time to process new-purchase loans.”

Chappelle noted that the Federal Home Loan Mortgage Corp., also known as Freddie Mac, has a similar program to streamline refinancing requests.

Major features of Fannie Mae’s program, effective immediately, include:

- Waiving the need for a new appraisal. Appraisals can cost as much as $500 or more. Waiving the requirement can happen if the refinancing is obtained from the current loan servicer and the lender warrants that the home’s appraised value has not depreciated. However, a new appraisal will be needed under any circumstances if the current loan is backed by either the Federal Housing Administration or the Veterans Administration.

- Waiving the need to requalify for the refinanced loan. This means the borrower doesn’t need to have his or her credit history, employment and other background investigated to determine if he or she can afford the loan.

This can happen if five conditions are met: The refinancing is obtained from the lender with the original loan file; the original mortgage met Fannie Mae standards for credit-worthiness; the borrower’s income has not declined since he or she qualified for the original loan; the borrower has a satisfactory payment record, and the monthly payment on the refinanced loan is no more than 15% greater than the payment at which the borrower was initially qualified.

- Reducing the requirements for income, employment and credit verifications. For example, if the loan amount is less than 75% of the value of the home, no new income verification is needed. In other situations, a current pay stub may be sufficient to show income and employment.

Not all Californians, however, will qualify for the streamlined procedures. To qualify, loans involved must be fixed-rate loans whose balances don’t exceed $187,600, Fannie Mae’s limit for loans it purchases on the secondary market.

“Obviously, that knocks out some areas of California,” where average home prices exceed those limits, Fannie Mae spokesman Gene Eisman said.

Also to qualify, loans must not exceed 90% of the home’s value, or 95% with mortgage insurance. For second homes, loans must not exceed 70% of the home’s value.

Borrowers must also not seek to take out cash through their refinancings. Borrowers can take out no more than 1% of the refinanced loan amount in cash.

However, loans eligible under the new rules can include those allowing borrowers to wrap closing costs into the loan amounts rather than paying them in up-front cash.

Separately, Fannie Mae reported Wednesday that its net income for the second quarter of 1989 totaled $193 million, up 60% over the $120.7 million of the year-ago quarter.

For the first six months of 1989, Fannie Mae’s net income totaled $358.2 million, up 62% over $221.6 million for the same period in 1988.