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Radical Refinance Solution for Homeowners in CARES Act forbearance

Will This Radical Refinance Idea Help Homeowners After COVID?

Radical Refinance Idea

It is unlikely that you will be eligible to refinance for up to 12 months after a forbearance, at least that’s the way the guidelines are now.

You may have to wait.

But not if I have a say.  I have a radical refinance idea that shouldn’t be that radical at all.

Last week, Fannie and Freddie rolled out a mortgage deferment option, but there are still questions about qualifying for these programs that are yet to be ironed out.  We’re staying on top of that story because this is great news for those that qualify.

This is a great first step toward defining what the path forward looks like for the almost 5 million homeowners now in forbearance around the United States, but it doesn’t go as far as it can go.

I am proposing that Fannie Mae introduce a new  COVID-19 special feature code to help coronavirus crisis victims take advantage of the lowest market rates available.

An Easy Solution

I am proposing that an easy solution for a large number of homeowners would be to allow families that are back to work the ability to refinance out of forbearance. I know that sounds easy on its surface, but it does get a little more complicated.

Lucky for us, the solution already exists and it should be an easy pivot for Fannie Mae to roll COVID-19 victims into existing exception guidelines or create a new one.

What this specifically looks like is allowing affected homeowners the ability to take cash out to pay past payments, pay off credit card debt or replenish reserves as an exception under the limited cash-out refinance guidelines.

What this means is that you avoid the costly “cash out hit” by paying off the debt incurred by the coronavirus crisis.  Loan Level Price Adjustments (LLPA) make your closing cost or your interest rate higher due to the risk associated with a cash-out refinance.

I am proposing that we already have the ability to make a couple of small tweaks to the machine and save hundreds of thousands of homeowners from being penalized a second time if they survive the first wave.

It’s Already Available

As we get closer to “normal”, and as CARES Act guidelines are defined and enforced, homeowners are looking forward to accessing equity to catch up on payments, replenish reserves, and take advantage of record-low rates.

Get the Facts About Forbearance - ForbearanceReport.org

This much we know:

  • Families will want to take advantage of low-interest rates as they get back to work.
  • Families will want to access home equity to pay off credit cards and debt incurred during the lockdown.
  • There are 2 precedents currently in place that would allow refinancing without waiting.

Let’s dig into each of these.

How Low Can Mortgage Rates Go?

One of the “silver linings” of the dark and challenging times that have fallen upon many homeowners during the COVID-19 coronavirus crisis is that mortgage interest rates are expected to stay low for some time.

In this video from Josh Lewis, he discusses the pressures that are currently on mortgage rates, and what rate look like moving forward.  Josh is the Broker/Owner of BuyWise Mortgage in California and does a regular update on the mortgage markets on his YouTube Channel here.

 

Access Home Equity to Pay Off Debt

Many families are going to incur different degrees of debt as lockdowns and furloughs slow or shut off household income.  It might come in the way of climbing credit card debt, a private loan or even replenishing a depletion of savings.

Having the ability to access the equity in your home to take advantage of low market rates and make yourself “financially whole” would go a long way toward helping families navigate these challenging times.

2019 Limited Cash Out Precedent

In pay off of Student Loan debt and PACE or HERO clean energy loans can be paid off during a refinance transaction, and considered as limited cash-out in terms of the application of loan-level price adjustments (LLPA).

Get the Facts About Forbearance - ForbearanceReport.org

To translate this into English, paying off Student Loans or clean energy loans are not considered the same as taking cash out, and your interest rate will be lower because of it.

You could make a pretty good argument that the skipped payments of the almost 5 million homeowners in forbearance would be on par with the burdens of student loans or clean energy loans.

Special Feature Codes

Special Feature Codes are required by the underwriter to be applied to Fannie Mae’s Desktop Underwriter.  Desktop Underwriter, also known as DU, is the most commonly used technology for underwriting conventional mortgage loans.

A special feature code identifies that an exception is being made or a unique feature exists on the file, and with the addition of a special code into DU, certain conditions are overlooked.

What we are primarily making an argument for is being able to use special feature codes to allow homeowners to refinance, catch up, and take advantage of the lowest rates available on the market today.

Here are a few examples of special feature codes that are being used today:

When you’re paying off a PACE or HERO clean energy loan in a refinance, as long as all of the cash out goes toward paying off this loan, this special feature code identifies this loan as being eligible for the limited cash-out exception.

PACE or HERO special feature code for limited cash out exception using Fannie Mae DU

The same thing goes if you are taking cash out to pay off student loan balances.  This special feature code similarly identifies these loans as being eligible for the limited cash-out exception.

Student Loan Cash Out SFC

Get the Facts About Forbearance - ForbearanceReport.org

So, ok, let’s agree that we can pay off any credit card balances and take a certain percentage of cash using a limited cash-out exception.  How do we get this loan through underwriting?  There’s already a way to do that.

It also seems like this special feature code could be used now. Maybe a quick and easy modification allows homeowners to pay “skipped payment” in forbearance and any debt that appears on the credit report.

Disaster Response Special Feature Code

And finally, if none of the above special feature codes applies to this specific National Emergency, it doesn’t seem difficult for Fannie Mae to move quickly to accommodate the rapid changes in the market.  There are two new special feature codes since COVID-19 to deal with loans originated and sold during the crisis.

COVID-19 Special Feature Codes

How Likely is This to Happen?

Honestly, my hopes are that this is already on the road map.  It seems like a no-brainer to me.  Homeowners should NOT be penalized for having to take a forbearance as a result of a loss of income during the COVID-19 crisis.

Get the Facts About Forbearance - ForbearanceReport.org

This limited cash-out refinance option would automatically take into consideration that there was a gap in employment, and a simple letter of explanation will suffice.  Other documentation like bank statements and verification of return to employment may be required for this option. Current income should be allowed, not penalizing you for the gap in employment that occurred during the financial hardship.

If anyone has any contacts in the higher echelons of Fannie Mae, could you pass this along?  I understand that there are more urgent issues to deal with right now as the first wave of forbearances comes up on the 90-day mark.

This isn’t going to be a popular topic with the servicers that currently hold these loans in forbearance, so I’m not kidding myself, this is an uphill battle.

But it seems like such a small concession to help so many thousands, and potentially hundreds of thousands of homeowners recover gracefully for this crazy time we find ourselves in.

Is anyone listening?  Or am I just crazy?

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Shrijana Bhatta says:

    Hi Scott!
    I am exiting out of 18 month forbearance this month and as I was looking into my options. I came across this article and now wondering if there’s a way out for me to take out an equity loan and payoff my forbearance loan, student loan and upgrade my old home from this equity loan. Please point me to the right direction. Thanks

    Shrijana Bhatta

    • Scott Schang says:

      Hi Shrijana, it depends on what kind of loan you have. Unless you are a military veteran with a VA loan, you will need 3 on-time payments after the forbearance to be eligible for a Conventional or FHA loan. Since HELOC equity loans are portfolio loans, you would have to ask the bank or credit union or lender offering the equity loan if they will allow this before having a payment history after forbearance.

      I deleted your phone number for privacy, if you would like to speak to a mortgage expert that I know and trust, you can find someone licensed in your state on the Mortgage Expert Directory HERE

      Hope this helps?