Americans are currently experiencing the tightest credit market in 16 years, which lenders are blaming on penalties from being forced to ‘buyback’ loans they were issued based on false or inaccurate information.
The US-backed companies, Fannie Mae and Freddie Mac, buy mortgages and package them into bonds and guarantee payments of principle and interest. Lenders require credit scores averaging about 740 on loans they sell to the two companies (this credit score is higher than the 700 average), which instigates a credit crunch and limits potential borrowers.
Buybacks by the GSEs have been blamed for the continuing credit crunch. Because lenders are often worried about a potential putback, they have raised prices on loans by purchasing credit overlays and limited lending to borrowers with lower credit scores. This past Monday, at the Mortgage Bankers Association’s annual conference, FHFA Director, Mel Watt relieved some concerns by announcing the agency’s plan to clarify buyback rules in a bid to ease credit. The FHFA is working with Fannie and Freddie to let them buy loans with down payments as low as 3 percent of purchase price (down payment percentages were increased on average to 5 percent last year).
Federal Housing Finance Agency (FHFA) is close to issuing refinements that will limit lender liability on buybacks of legacy loans. Watt says that the two mortgage giants, Fannie Mae and Freddie Mac have reached agreements with lenders that better define the practices that would trigger penalties for those lenders. This will let lenders know “what they are and when they apply to loans that have otherwise obtained repurchase relief”, and will hopefully ease tight credit standards that are bringing the housing market down.
Life-of-loan exclusions essentially allow Fannie Mae and Freddie Mac to require lenders to repurchase loans at any point during the term of the loan, increasing liability for banks and mortgage lenders. The FHFA wants to change that to boost credit availability.
Currently, the life-of-loan exclusions are open-ended and make it difficult for a lender to predict when Fannie Mae or Freddie Mac will apply one of them, or even if they will. Watt explained that the new exclusions “will result in better representation and warranty framework and facilitate market liquidity”.
The GSEs are in the process of updating definitions of the exclusions that fall into the following six categories:
1) Misrepresentations, misstatements and omissions
2) Data inaccuracies
3) Charter compliance issues
4) First-lien priority and title matters
5) Legal compliance violations
6) Unacceptable mortgage products
For loans that have already earned repurchase relief, the GSEs are clarifying that only life-of-loan exclusions can trigger a repurchase under the framework.
Mel Watt gave a glimpse of a few of the upcoming changes:
Fannie and Freddie will set a “minimum number of loans that must be identified with misrepresentations or data inaccuracies to trigger the life-of-loan exclusion.
- This allows more management to detect patterns regarding misrepresentations or data inaccuracies that warrant an exclusion, “but not to revoke repurchase relief they have already granted if they subsequently discover that a lender incorrectly calculated the debt-to-income ratio or loan-to-value ratio on a single loan”, states Watt.
The GSEs plan to add a “significance” requirement to the misrepresentation and data inaccuracy definitions.
- This test will require the Mortgage giants to test whether the loan would have been ineligible for purchase if the loan data had been accurately reported. The test will use their automated underwriting loans.
The GSEs and the FHFA are working together to develop guidelines for mortgages with loan-to-value ratios between 95% to 97%
- With these revised guidelines, it is hopeful that “Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account ‘compensating factors’” Watt said. This plan, optimistically prepares the Mortgage Industry to increase access for less affluent borrowers.
Additionally, the GSEs progress regarding designing and implementing the Common Securities Platform that Fannie and Freddie will jointly own and use to issue mortgage backed securities was discussed. “Loans with misrepresentations or data inaccuracies won’t be automatically fodder for potential repurchases, unless a lender exceeds a minimum number of mortgages with such problems”, stated Watt.