November 15, 2011 / 11:24 PM / 8 years ago

Fannie, Freddie cut lenders' risk in refinance program

WASHINGTON (Reuters) - Fannie Mae FNMA.OB and Freddie Mac FMCC.OB, the largest sources of U.S. housing finance, both said on Tuesday they would relieve lenders from certain risks associated with refinanced loans in an effort to help a government program reach more distressed homeowners.

In new guidelines for the Home Affordable Refinance Program, both companies said separately they are relieving lenders of certain representations and warranties that are related to the value and condition of mortgaged property.

HARP seeks to provide refinancing options for borrowers who have little or no equity in their homes. It is open only to loans sold to Fannie and Freddie.

The changes are designed to encourage lenders to participate by reducing their potential liability for bad loans.

The Obama administration program aims to help troubled borrowers get new loans at lower rates. So far, it has helped about 894,000 borrowers, far fewer than the White House had hoped.

Fannie Mae, in its revised HARP guidelines, said, “The lender is not responsible for any of the representations and warranties associated with the original loan.”

Freddie Mac said the changes in its policies regarding representation and warranties is mainly for mortgages valued at more than 80 percent of a property’s worth.

Around 11 million U.S. homeowners owe more than their homes are worth.

The change dampens the “put-back risk” for lenders, which is the possibility that the bank originating or refinancing a loan will have to repurchase it from Fannie Mae and Freddie Mac because the underwriting violated the mortgage finance giant’s guidelines.

Previously, lenders were held responsible if any problems occurred with the loans or if they defaulted. Fannie Mae and Freddie Mac have actively sought to force lenders to repurchase loans.

The changes should limit the costs and simplify the process for borrowers refinancing through HARP, according to analysts.

Reporting by Margaret Chadbourn; Editing by Leslie Adler

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