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FHA, Fannie And Freddie Regulator Moving To Ease Mortgage Credit

A shift by the federal regulator of Fannie Mae and Freddie Mac could soon make getting a mortgage loan easier by giving lenders more wiggle room before the mortgage giants demand that they repurchase loans.

In his first public remarks since taking over as head of the Federal Housing Finance Agency, Mel Watt said he wants to address uncertainties surrounding the “representation and warranty” standards that can trigger repurchase demands.

Going forward, new borrowers will be allowed to miss two payments during the first three years after taking out a mortgage without triggering a repurchase demand from Fannie and Freddie. The mortgage giants will also not automatically demand that lenders repurchase loans if a loan’s primary mortgage insurance is rescinded.

Watt said Fannie and Freddie will continue to allow Fannie and Freddie to approve loans with debt-to-income levels above 43 percent when borrowers have “other compensating strengths,” and keep current loan limits in place.

Those moves could embolden lenders to approve mortgages to borrowers who meet all of Fannie and Freddie’s other underwriting requirements, but who previously might have seemed to pose too great a repurchase risk.

When lenders have done their due diligence and made sure borrowers meet Fannie and Freddie’s underwriting standards, the mortgage giants keep payments flowing to investors in mortgage-backed securities that mortgages are bundled into, even when borrowers default.

During the housing bust, Fannie and Freddie demanded that lenders repurchase billions in mortgages that the companies determined in hindsight had not met their underwriting standards, in many cases because lenders allegedly misrepresented the circumstances under which the loans were made.

While loans made today are defaulting at much lower rates, loan originators that want to sell loans to Fannie and Freddie want more certainty about what will happen if there’s another downturn and borrowers stop paying their mortgages. Will Fannie and Freddie guarantee payments to MBS investors or demand that loan originators repurchase their loans?

Watt said he understands that lenders want even more clarity around how representations and warranties will be enforced, particularly in the long run.

He said FHFA is looking to provide more guidance around the “scope of life of loan exemptions.” We know that lenders are concerned about how these exemptions apply to loans that have passed quality control reviews or have met the 36-month benchmark, and we will work toward clarity on this issue.

FHFA also intends to establish an independent dispute resolution program lenders can use to challenge repurchase demands; develop “cure mechanisms” to let lenders fix loan defects rather than relying solely on repurchases; and provide additional clarity on Fannie and Freddie’s underwriting rules.

In a separate announcement today, the Department of Housing and Urban Development outlined similar steps the Federal Housing Administration is taking to expand access to credit for underserved borrowers.

The average credit score on loans purchased by Fannie and Freddie is 752, FHA said, and there are 13 million people with credit scores ranging from 580 to 680.

“Shutting these consumers out of the market hurts American families and undermines our efforts to build more stable communities, create pathways to the middle class, and increase homeownership opportunities for minority and low-wealth borrowers. A healthy mortgage market serves all qualified borrowers. FHA is committed to finding ways to responsibly increase access for underserved borrowers.”

The FHA’s “Blueprint for Access” outlines steps the agency expects to take in coming months, including the establishment of “clear rules of the road” to help lenders quantify the risk of making a mortgage loan.

“Taking steps to establish clear quality assurance policies helps ensure lenders can make loans without fear of unanticipated consequences,” FHA said.

One step FHA is taking is developing a new methodology for evaluating underwriting defects to help lenders better assess the risk posed by a specific deficiency and more easily address the root causes of defects.

To encourage more borrowers to get counseling that can reduce defaults, the FHA plans to roll out a new pilot program — Homeowners Armed with Knowledge (HAWK) — that’s expected to save the average buyer $325 a year on FHA mortgage insurance premiums.