FHFA Sees Major Loan Quality Improvements at Fannie/Freddie

The Federal Housing Finance Agency is seeing significant improvement in the quality of loans at Fannie Mae and Freddie Mac as a result of tighter underwriting standards promulgated by the two.

Moreover, FHFA chief Edward DeMarco said when it comes to loss mitigation efforts, the GSEs are making inroads, thanks to "more aggressive modifications" and other foreclosure prevention activities.

"Servicers working with borrowers are being successful in curbing the volume of foreclosures even if it doesn't specifically result in a HAMP mod," he said, speaking at the Second Annual Best Practices in Loss Mitigation Conference in Dallas sponsored by SourceMedia.

"Only a small percentage of loans are quickly redefaulting," said the acting director. "Loss mitigation strategies will continue to be critical to limit the losses of Fannie and Freddie."

His comments about loan quality come six months before the Obama White House will release its blueprint for restructuring Fannie Mae and Freddie Mac, which for decades have been the main source of liquidity for half the residential loan market. Of late, their market share has been closer to 70%.

Regarding the future of housing finance, the regulator gave no hints as to where the White House is headed, but said the industry should strive for innovation and regulation to protect consumers and taxpayers. "Allow for consumer choice," he said. "A robust housing system should include a customized product offering, not a one-sized approach to mortgages. Provide consumer protection."

DeMarco told attendees at the conference that roughly 80% of borrowers who had HAMP modifications canceled were put into some type of "foreclosure alternative" by servicers.

From yearend 2008 to March 31 of this year, the number of completed loan modifications involving Fannie and Freddie increased from 24,000 to 138,000.

Thirty-four percent of Fannie/Freddie modifications reduced monthly payments by 28% or more. More than a quarter of the modifications resulted in no change in payments or actually saw an increase in payment.

In the second quarter, 67% resulted in payment declines of 20% or more. Only 12% of mods resulted in increased or unchanged payments. "These are resulting in a stronger post-modification performance," said the GSE regulator.

The number of GSE-modified loans that were still performing three months after being altered increased to 78% in the fourth quarter from 59% in the third quarter.

Meanwhile, the Treasury Department is still working on implementation details with regard to improving HAMP. In response to a question, DeMarco said the GSEs will not sign up for the program (known as HAMP 2 in some circles) without seeing the fine print.

"With every proposed addition to new options for loss mitigation, HAMP or something else, we must weigh that with whether or not it's going to meet goals of conservatorship, present operational burdens and other risk. We are evaluating the issue. There are challenges."

One conference attendee questioned DeMarco about increasing the 31% debt-to-income ratio (for mortgage payments) under HAMP to 60% or 65%, taking into account other household debts.

"It is not clear what kind of incentive that creates," he said. "Households are so credit exposed and operating on the edge of what their income was. It did not take much underemployment — not just unemployment — but also loss of bonuses and reduction in hours to create so much difficulty. The credit exposure with respect to their debts is part of the untold story of what's been going on during this crisis that effects the American household and defaults."