Loan refinancing programs “often work against consumers” and should be streamlined and standardized, researchers at the Massachusetts Institute of Technology (MIT) and the Urban Institute say.
“Some of the rules do not allow consumers to refinance, even when it is in their interest to do so,” according to a new paper authored by MIT’s Edward Golding and the Urban Institute’s Laurie Goodman and Ted Tozer.
“And the current system can be gamed,” the report states.
The authors propose a unified system of rules for rate-and-term refinances to be followed by the Federal Housing Administration (FHA), Veterans Affairs (VA) and the government-sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.
“It would make sense for the GSEs, the FHA, and the VA to have consistent rules for streamlined refinances,” the authors write.
Reforms, they add, should eliminate regulations that discourage lenders and servicers from reaching out to borrowers when they could benefit from refinancing.
“If the rules were harmonized and publicized, there would be greater consumer awareness and greater borrower take-up,” the authors say.
Among the biggest changes would be allowing the GSEs to introduce a streamlined refinance program. Unlike the VA and FHA, the GSEs require full underwriting of all refinances, including borrowers who already hold conventional loans.
The authors also advocate reforms to ensure the refinanced loan is saving the borrower money, as well as to prevent the practices of “churning,” where borrowers are tricked into refinancing without any real benefit.
They propose a standard net tangible benefit test in which the new fixed rate must be 50 basis points lower than the old rate. That lines up with current VA and FHA requirements.
In the case of the FHA and VA, however, the authors also advocate preventing refinancing borrowers from rolling their closing costs into the loan amount, which can give the borrower the illusion of savings while increasing the mortgage substantially.
Under the new standard, the closing costs could be paid by the borrower or rolled into the rate, which the authors say would give borrowers a clearer picture upfront of the true cost of the refinanced loan.
The authors also propose several ways to remove impediments to refinancing, including eliminating prepayment penalties.
