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US mortgage industry is in uproar over surprise announcement by Fannie Mae & Freddie Mac, they will charge 0.5% “adverse market refinance fee”

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My bolding:



Risks for refis are high because home “value” may be fantasy.

A cash-out refinance mortgage with 30-year fixed rate, fully documented, with a 65% loan-to-value ratio – meaning the loan amount equals 65% of the home’s “value,” seemingly leaving a lot of “equity,” thus seemingly very low risk – has the same default proclivity under stress as similar purchase mortgages with a 91%-95% loan-to-value ratio.

In other words, seemingly low-risk refis are as risky as much higher-risk purchase mortgages; and compared to purchase mortgages with equivalent metrics, refis are much riskier.

“And the GSEs’ currently guarantee cash-out loans up to 80% loan-to-value,” the AEI said.

The major reason why refis are so much riskier than purchase mortgages is the simple fact that there is no arm’s-length transaction and no arm’s length purchase price that determines the value of the home.

It boils down to this question, the AEI said: “what do you need the value to be?”

No appraisal, no problem.

This valuation risk has been further heightened by increased use of “automated appraisal waivers” that the GSEs use to decide when no appraisal is needed. So now, there is no arm’s length transaction and not even an appraisal.

“Given that this tool is embedded in the GSEs’ automated underwriting systems (AUSs), and a loan may be submitted multiple times, this system is subject to gaming. We saw this happen with waivers of income documentation back in the ‘00 years,” the AEI said.

“Automated systems make it much faster to distribute system-based underwriting rules and home price information to the marketplace,” the AEI said. “Given the GSEs’ 60% market share, it would be hard to design a system that was better at fueling refinance demand and risk.”

“Yet, like the AUSs of the ‘00s, the GSEs’ large scale use of automated appraisal waivers today has not been tested in a down cycle,” the AEI said. “In the ‘00s, we ultimately found out they were so wrong, that virtually all local markets were subjected to severe home price corrections the likes that hadn’t been seen since the Great Depression.”


Nobody will have seen it coming.


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