Freddie Mac Guidelines: Enhanced Relief Refinance Cash Adjustor (Suspended)

What Enhanced Relief Refinance Was Designed to Do

The Enhanced Relief Refinance program was Freddie Mac's version of a streamlined refinance option for borrowers who were underwater on their mortgages or had limited equity. Similar to Fannie Mae's High Loan-to-Value Refinance Option (HIRO), this program allowed qualified borrowers to refinance even when their home's current value was less than what they owed.

The cash adjustor provision in guideline 4304.9 specifically addressed how lenders could handle cash-out scenarios within these refinances. Under normal circumstances, Enhanced Relief Refinance mortgages were designed to be rate-and-term refinances only. The cash adjustor allowed for small amounts of cash to the borrower under specific circumstances.

Say you had an existing Freddie Mac mortgage with a balance of $250,000, but your home was only worth $240,000. Under the Enhanced Relief Refinance program, you could potentially refinance to a lower rate even though you were $10,000 underwater. The cash adjustor provision would have governed any small cash amounts you might receive at closing.

Why the Program Was Suspended

Freddie Mac suspended the Enhanced Relief Refinance program in mid-2021 as mortgage market conditions changed dramatically. The combination of rising home values, historically low interest rates, and increased refinance volume made the program less necessary for most borrowers.

During the COVID-19 pandemic, home values increased rapidly in most markets. Borrowers who were previously underwater on their mortgages suddenly found themselves with equity. This eliminated the primary need for Enhanced Relief Refinance mortgages, which were specifically designed for underwater borrowers.

The suspension notice states that mortgages "are not eligible for delivery until further notice." This language suggests Freddie Mac may reactivate the program in the future if market conditions warrant it, but no timeline has been provided.

How the Cash Adjustor Would Have Worked

Before the suspension, the cash adjustor provision allowed borrowers to receive limited cash proceeds from their Enhanced Relief Refinance. This was an exception to the general rule that these refinances had to be rate-and-term only.

The cash adjustor typically covered legitimate closing costs and fees that exceeded what could be rolled into the loan amount. For example, if your closing costs were $8,000 but the loan amount could only increase by $6,000 due to program limits, you might have been eligible for $2,000 in cash to cover the difference.

This provision also addressed situations where borrowers had made principal payments or improvements that created small amounts of equity. Rather than forcing borrowers to bring cash to closing or abandon the refinance, the cash adjustor provided flexibility within strict limits.

Documentation That Would Have Been Required

If the program were active, lenders would have needed to document any cash adjustor amounts carefully. The file would need to show exactly how the cash amount was calculated and that it fell within program guidelines.

Required documentation would have included a detailed closing cost worksheet showing all fees and expenses. Any cash back to the borrower would need clear justification, such as covering legitimate closing costs that couldn't be financed.

The loan file would also need evidence that the refinance met all other Enhanced Relief Refinance requirements, including payment history, occupancy status, and loan-to-value calculations based on current property values.

Current Alternatives for Underwater Borrowers

With Enhanced Relief Refinance suspended, underwater borrowers have fewer options but some alternatives still exist. Fannie Mae's High Loan-to-Value Refinance Option remains available for eligible borrowers with Fannie Mae loans.

Borrowers with FHA loans can use the FHA Streamline Refinance program, which allows refinancing without a new appraisal in many cases. VA borrowers have the Interest Rate Reduction Refinance Loan (IRRRL) program.

Some borrowers who were previously underwater may now have equity due to rising home values. A standard conventional refinance might be possible if your home's value has increased enough to bring your loan-to-value ratio to acceptable levels.

What This Means for Lenders

Lenders cannot originate new Enhanced Relief Refinance mortgages under current guidelines. Any loans in the pipeline when the suspension took effect needed to be handled according to the specific timing rules in the notice.

Loans with application dates before July 1, 2021, could potentially still be delivered if they settled by August 31, 2021. Any loans settling after that date, regardless of application date, became ineligible for delivery to Freddie Mac.

This created complications for lenders who had loans in process when the suspension was announced. Some had to find alternative execution methods or help borrowers explore different loan programs.

Monitoring for Program Changes

Borrowers who might benefit from Enhanced Relief Refinance should monitor Freddie Mac announcements for any program updates. The "until further notice" language in the suspension suggests the program could potentially restart if market conditions change.

Lenders typically receive updates through Freddie Mac bulletins and industry communications. Borrowers can ask their loan officers to notify them if the program becomes available again.

The mortgage industry changes frequently, and programs that are suspended can sometimes be reactivated with modifications. However, there's no guarantee that Enhanced Relief Refinance will return or what its terms might be if it does.

References

For the official guidelines, see 4304.9: Cash adjustor under fixed-rate Cash for Freddie Mac Enhanced Relief Refinance® Mortgages in the Freddie Mac Selling Guide.