Regulators who oversee Fannie Mae, Freddie Mac and the Federal Housing Administration are telling mortgage lenders that they’re ready to cut them some slack, and mortgage lenders say they’re ready to run with the ball.
Speaking at the Mortgage Bankers Association’s annual convention, Mel Watt — who runs Fannie and Freddie’s regulator, the Federal Housing Finance Agency — said a pact with the mortgage giants to be unveiled in coming weeks should ease many of the fears lenders have about extending credit to riskier borrowers.
Watt acknowledged lenders’ complaints about the lack of clarity around exactly what circumstances can trigger buyback demands from Fannie and Freddie.
The “respresentation and warranty” requirements that lenders must agree to when selling mortgages to Fannie and Freddie were designed to protect the mortgage giants from sloppy and fraudulent lending practices. But lenders have said that as written, the requirements can create liability for them on all but the safest loans to the most creditworthy borrowers.
“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,” Watt said Sunday in a speech to bankers.
Watt confirmed media reports that FHFA has reached an agreement with Fannie and Freddie on revising the representation and warranty requirements, and said lenders can expect to get more clarity in coming weeks.
The revisions will still allow Fannie and Freddie to demand that loan originators buy back a loan at any time when there has been a “pattern of misrepresentations or data inaccuracies,” Watt said.
But Fannie and Freddie will no longer be able to demand that lenders buy back loans if they fail during quality control reviews to discover mistakes made during the underwriting process, such as an incorrect debt-to-income ratio calculation on a single loan.
Fannie and Freddie will also be allowed to bring back programs allowing them to guarantee some mortgages with down payments of as little as 3 percent. Like other loans made to borrowers making down payments of less than 20 percent, Fannie and Freddie will require them to obtain mortgage insurance at additional expense.
Mortgage Bankers Association President David Stevens called Watt’s speech, and similar remarks from Housing Secretary Julián Castro, “extraordinary announcements and extremely positive” for mortgage lending, the Wall Street Journal reported.
In his address, Castro noted that even former Federal Reserve Chairman Ben Bernanke has said that he had trouble refinancing his mortgage.
“If the former Fed chair is having trouble, imagine the frustration of average folks,” Castro told mortgage bankers. “The pendulum has swung too far in the other direction. There’s been a vacuum in the market and it needs to be filled.”
Castro said FHA is revising its Single Family Housing Policy Handbook to give lenders greater clarity on rules governing loan originations, and is finalizing a new performance metric designed to ensure that lenders aren’t unfairly punished for trying to serve borrowers with lower credit scores.
Many lenders have already “stepped up and been successful in expanding credit to a wider range of responsible borrowers,” Castro said, noting that half of the top 10 FHA lenders are new to the list in the last three years. “My question for you is where do want to be in this market opportunity? On the frontlines? Or do you want to leave business on the table?”