FHFA - What’s Good for the Lender is Good for the Borrower
Will Looser Credit Requirements Help?
If mortgage lenders are in business to originate mortgages, then why is it hard for so many borrowers to get a mortgage?
Following the 2007 Housing Crash and 2008 Great Recession, lenders tightened their credit requirements. Lenders, that sell loans to Fannie Mae or Freddie Mac, must follow Fannie and Freddie’s very complicated and detailed underwriting guidelines. These tight guidelines have left many borrowers out in the cold.
For example, Fannie Mae and Freddie Mac‘s minimum credit score requirements (for most loans) is 620. However, many lenders apply stricter rules and won’t work with borrowers unless they have a much higher FICO score. Lenders do this, in large part, to avoid getting charged back for the loan if the borrower defaults.
In this instance, it isn’t the FHFA rules that are hindering the mortgage market. It is the lenders' stricter rules that cut off credit to borrowers who could qualify for a home purchase mortgage.
FHFA: Help the Lender to Help the Borrower
In order to help stimulate the housing market, the FHFA, which oversees Fannie Mae and Freddie Mac, has proposed changing some of their rules. Mel Watt, in his October 20th 2014 speech to the Mortgage Bankers Association (MBA) proposed opening up credit to borrowers by:
- Easing the Buyback rules: Reducing the risk to lenders by clarifying the Representation and Warranty Framework.
- Helping low-wealth borrowers: Lowering down-payment requirements to 3%.
Easing Buyback rules: Help Lenders Lower Overlays
Currently, the FHFA can demand that a lender buyback a mortgage, if they find that the lender did not properly follow the underwriting guidelines and rules around representation and warranties.
In order to protect themselves from unclear warranty and representation rules and strict buyback procedures, lenders create even stricter credit requirements. This blocks a large number of potential borrowers from obtaining a mortgage.
In order to encourage mortgage lenders to offer credit, in January 2013 the FHFA created a rule that relieves lenders from their warranty and representation requirements related to the borrower and property underwriting guidelines, if the borrower makes 36 timely payments. In May 2014, the FHFA added some more changes to help refine this process.
However, in order to protect themselves from fraud or important noncompliance issues, Fannie Mae and Freddie Mac also have life-of-loan exclusions. Mel Watt, in his October speech, admitted that,
The current life-of-loan exclusions are open-ended and make it difficult for a lender to predict when, or if, Fannie Mae or Freddie Mac will apply one of them.
While we believe that the FHFA should improve the buyback process and offer more transparency in their decision making process, we do not believe that these changes will radically change the marketplace. New mortgage rules, such as the Qualified Mortgage rule and the Ability To Repay rule, make it all that more important for lenders to follow the already strict underwriting and compliance rules.
Reinstating the 97% LTV loan: Help Low-Wealth Borrowers
Mel Watt also mentioned that he would like to see Fannie Mae and Freddie Mac re-instate the 3% down payment loan. Currently the lowest down payment in a FHFA loan is 5%.
Correctly so, Watt sees this as an issue that will have a limited effect on the marketplace. Even with a limited emphasis is on helping low-income, low-wealth borrowers buy low-cost affordable housing, it opens up home ownership to more people than currently can qualify.
Making Credit More Available
We applaud Mel Watt’s efforts to improve the mortgage market and make credit available to a larger number of qualified borrowers. In many cases, strict lender requirements drive potential borrowers from the market. On the other hand, mortgage lenders need to protect themselves from potential buybacks.
however, the new proposals are limited in scope and will not radically change the market. lenders and borrowers need to focus on the essentials:
- lenders need to focus on complying with the rules, including the qualified mortgage rule, and the ability to repay rule.
- lenders should focus on creating a more efficient and transparent mortgage process. compliance issues need to be dealt with upfront before they become a quality control issue.
- borrowers need to focus on finding affordable housing and an affordable mortgage. overextending oneself by taking a risky mortgage is a poor choice.
- borrowers need to take advantage of a more open and competitive mortgage market and shop around to find the best terms that fit their situation.