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Fannie and Freddie May Say Goodbye To Appraisals

[Dec 11, 2008.]


It's been reported by Bloomberg.com that Fannie Mae and Freddie Mac are both considering a plan to allow homeowners to refinance their mortgage without the need for a new appraisal.

Government officials are hoping that such a plan could help many homeowners unable to obtain loan modifications from their current mortgage companies.

"If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit?” Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”

Those that oppose the plan believe it would be reckless for the Government Sponsored Entities (GSE's) to lend money with no regard for the value of the collateral. They believe it would be difficult to find investors to purchase loans without current appraisals.

The U.S. Department of Housing and Urban Development has permitted what are called "streamlined refinances" on Federal Housing Authority (FHA) loans since the 1980's.

These refinances without an appraisal are limited to situations where the borrower is simply refinancing the existing principal loan balance and not attempting to extract any cash from the property.

Details of the Fannie Mae and Freddie Mac plan have not been released, however, many believe it will be modeled after the FHA Streamline Refinance program. One obstacle, however, will be working with private insurers to underwrite the mortgage insurance on these loans. In the case of FHA loans, the insurance is underwritten by the government.

Allowing borrowers to refinance their mortgage without requiring an appraisal will help many underwater homeowners qualify for new financing. Whether they still have the required credit and income to qualify are separate matters. Also at question is whether homeowners who are underwater before or after a refinance will eventually walk away from the property given there may be no financial incentive to stay.


About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.

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