Fall 2011 Mortgage Trends
Handing over house keys
Refinance soon to avoid stricter rule

One option might be a loan insured by the Federal Housing Administration because, as proposed, the rule would exclude FHA loans. Today, these loans don't require much equity to refinance. However, borrowers must pay for mortgage insurance and, as Dickson says, the maximum loan sizes in high-cost areas are set to drop Sept. 30.

Another option might be a conforming loan, which lenders can sell to Fannie Mae or Freddie Mac. The proposed rule allows conforming loans to avoid the risk retention requirement, but only as long as Fannie Mae and Freddie Mac continue to operate under federal government conservatorship. Should these entities be privatized, an eventuality that has some support in Washington, D.C., conforming loans might not be an option for equity-poor homeowners.

A third possibility might be a loan that has mortgage insurance. As proposed, the rule doesn't say whether these loans will be excluded from the risk retention requirement. That's because the six federal agencies are sorting through the hundreds of comment letters they received during the period that ended Aug. 1. Mortgage insurance more than likely will be addressed in the final rule.

Yet another option for homeowners would be to bring cash to closing in what's known as a cash-in refinance. This strategy lowers the homeowner's outstanding loan balance, boosting the equity ratio to meet the requirement. Again, there's a downside: Dickson says mortgage closing costs are more expensive today, which means borrowers have less cash to contribute for the equity boost.

HARP to sunset

Astute homeowners might wonder how the QRM definition will affect the Home Affordable Refinance Program, or HARP. This program enables homeowners to refinance up to 125 percent of their home's value. To qualify, homeowners have to owe more than the home is worth, be current on their mortgage and have a loan that's owned or backed by Fannie Mae or Freddie Mac.

How QRM and HARP would coexist is an intriguing question, but probably moot since HARP is set to sunset June 30, 2012. That means unless HARP is extended, it will end before the risk retention rule gets a chance to kill it.

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