Are Fannie and Freddie about to get loose?
At the recent Mortgage Bankers Association annual convention, Federal Housing Finance Agency (FHFA) Director Mel Watt and US Secretary of Housing and Urban Development (HUD) Julian Castro announced a relaxation of lending standards for Government-Sponsored Enterprises (GSEs).
The FHFA says it plans to clarify the Representations and Warranty Framework to help reduce repurchases and help the US housing market recover from the recession.
“We know that the Representation and Warranty Framework did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan,” Watt noted. “And, we know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations.”
The changes will include clearly defining life-of-loan exclusions, which include six categories:
- Misrepresentations, misstatements, and omissions
- Data inaccuracies
- Charter compliance issues
- First-lien priority and title matters
- Legal compliance violations
- Unacceptable mortgage products
For loans that have already earned repurchase relief, Watt said that only life-of-loan exclusions can trigger a repurchase under the revised standards.
Officials say the current standards don’t provide enough information about when Fannie or Freddie will exercise their remedy to require a loan repurchase. As a result, lenders have imposed credit overlays that drive up the cost of lending and restrict lending for some borrowers.
In one of the most significant policy changes, Watt announced that the FHFA will specify a minimum number of loans that must be identified with misrepresentations or data inaccuracies to trigger the life-of-loan exclusion. The goal is to ensure that GSEs respond to a pattern of misrepresentations or data inaccuracies, not just outliers.
Down payments as low as 3%
The FHFA also announced that new rules will allow Americans to buy homes with down payments as low as 3% when those loans are “sensible.” The agency said those lower down payments would be allowed after taking into account “compensating factors,” though those factors were not specified.
As part of the new guidelines, HUD plans to expand access to credit with four Blueprint for Access initiatives:
- Revise the Single Family Housing Policy Handbook to give lenders clarity on policies and compliance
- Launch the Supplemental Performance Metric to capture a more in-depth view of a lender's portfolio performance, comparing similar lenders
- Revise the Loan Defect Taxonomy to streamline 99 different codes into nine categories of loan defects
- Initiate a Ginnie Mae pilot program to give smaller lenders more access to the secondary market
Because banks are still subject to scrutiny from other agencies not bound by FHFA or HUD rules, such as the Justice Department, how much lending practices will really change in the short-term is unknown.
For more information on this topic, or to learn how Baker Tilly banking specialists can help, contact our team.