Plan for Fannie and Freddie to refi loans faces legal issues

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The Obama administration last week detailed how it wants to use Fannie Mae and Freddie Mac to refinance millions of mortgages for struggling homeowners who have little or no equity in their houses.

But would it be legal?

From Bloomberg News:


President Barack Obama’s plan to use mortgage-finance companies Fannie Mae and Freddie Mac to refinance as many as five million loans may face legal challenges over whether the administration is overstepping its authority. The proposal may violate requirements that homeowners put up at least 20% of the appraised value of a home or carry mortgage insurance, said U.S. Rep. Scott Garrett of New Jersey, the ranking Republican on a panel that oversees the companies. ‘I don’t see how that stands in face of what the statute says’ that governs Fannie and Freddie, Garrett said in an interview. ‘It certainly seems as though they need to seek a congressional change, a legislative statutory change.’

Maybe that’s no problem, in any case, with the Democrats controlling the House and Senate.

Fannie and Freddie’s chief regulator, James Lockhart, has said he believes the plan is exempted from the mortgage-insurance rules in the companies’ charters because it would treat the refis as modifications rather than as new loans. . . .

But as Bloomberg notes, that sounds like trouble to owners of Fannie’s and Freddie’s mortgage-backed securities, who stand to lose if refis surge and rates on existing loans are written down:

Fannie and Freddie’s charters say ‘in black and white, everything over 80% loan-to-value requires mortgage insurance, and you say, ‘No, there’s wiggle room there,’ ‘ said Julian Mann, who helps manage about $4 billion in bonds at money manager First Pacific Advisors in L.A. The change in policy will cause some mortgage-bond investors to lose money as borrowers refinance at rates that are close to record lows and pay down higher-yielding securities, eroding the value of those holdings, he said. ‘If you start playing fast and loose with written rules, you undermine the whole fabric of the capital-market system and you call into question contract law on everything,’ Mann said.

Maybe, but for bond holders, the question is whether they want to risk backlash from the White House for not ‘doing their part’ to help ease the housing mess.

What’s certain is that, under Obama, push is coming to shove on mortgage refis for strapped homeowners.

As Paul Miller, an analyst at FBR Capital Markets, told Bloomberg: With Fannie and Freddie under government control, “They’re a public policy arm of the federal government right now. They aren’t being run for profitability.”

-- Tom Petruno