Banks and mortgage lenders are unlikely to loosen credit on home loans any time soon until Fannie Mae and Freddie Mac release more details on the latest efforts to jump-start the housing market.
To encourage lenders to make more loans to borrowers with lower credit scores, the regulator for Fannie and Freddie promised far more clarity on mortgage-buyback requests. Fannie and Freddie also will lower down-payment requirements to as little as 3% to 5% for borrowers that have "compensating factors," such as higher credit scores or incomes.
Still, many mortgage lenders remain gun-shy about loosening credit after being forced by Fannie and Freddie to repurchase billions of dollars in soured loans since 2008. Regulatory enforcement actions, as well as hefty fines from the Consumer Financial Protection Bureau and the Justice Department, continue to weigh heavily on lenders.
"The devil is in the details," said Brad Groves, the chief financial officer of Universal Lending in Denver. "We're still trying to figure out what's a foot fault. I didn't hear anyone say that if it's a mistake, it's not a buyback."
Several lenders said the reduced down-payment requirements amounted to "window dressing" because borrowers can already get such loans from the Federal Housing Administration. Others said policymakers are contradicting themselves. On the one hand, they want lenders to loosen credit while on the other they continue to penalize lenders for past mistakes.
Lenders have long complained that the threat of repurchases by Fannie and Freddie caused them to impose restrictive credit standards known as overlays (such as a FICO score of 680 or above) that crimped access to credit for many borrowers.
"This will help lenders move in the direction of reducing credit overlays," said Hank Cunningham, the president of Cunningham & Co., a mortgage bank in Greensboro, N.C. "But we're going to have to wait and see how it plays out."
The most significant change to the government-sponsored enterprises' policies is that lenders now have six clearly defined categories that can trigger mortgage repurchases and an additional "significance" test for data reported inaccurately by lenders. Fannie and Freddie will determine, based on their automated underwriting systems, if a loan would have initially been ineligible for purchase had the lender reported the loan information accurately.
The changes were announced Monday by Mel Watt, the director of the Federal Housing Finance Agency, which regulates Fannie and Freddie. Watt gave a highly detailed speech at the Mortgage Bankers Association's annual convention in Las Vegas in which he struck a far more conciliatory tone than his predecessor, former acting FHFA Director Ed DeMarco.
"We recognize that you are essential stakeholders in this process," Watt said Monday. "As lenders, you play a central role in the overall housing market, and the work you do touches borrowers in communities across the country. You help individuals and families become homeowners."
The FHFA made three changes to the GSEs' so-called representation-and-warranty framework that were lobbied for heavily by the MBA. The new guidelines require that any inaccuracy or fraud in a loan file would have to be "significant" to trigger a repurchase. The FHFA also is developing an independent dispute-resolution process to give mortgage lenders in conflicts with Fannie or Freddie a hearing from an independent third party. Lenders also will have the ability to cure minor loan defects.
Earlier this year Watt relieved lenders of some repurchase risk on loans that had clean payment histories for three years. Borrowers are now allowed two 30-day delinquencies within 36 months. Moreover, lenders may win relief from buybacks following a quality-control review of a loan within 30 to 120 days. Despite those major changes, lenders did not loosen credit requirements.
The changes Monday relate to the "life-of-loan" repurchase risk for fraud and misrepresentations. Lenders still complain they are forced to buy back loans for nitpicky mistakes or for issues that have nothing to do with underwriting, such as if borrowers lose their jobs.
Some mortgage lenders said policymakers could better aid the housing market by reducing the FHA's sky-high annual and up-front insurance premiums or cutting Fannie and Freddie's loan-level pricing adjustments. Others said the "ability to repay" requirements imposed by the Dodd-Frank Act are simply having their intended effect of eliminating borrowers who cannot document their income.
"It really gets into the guts of underwriting the loans," said Tom Wind, the executive vice president of home lending at EverBank. "In the past, lenders could take into account compensating factors, but now the way you have to determine income, that's where a lot of people just fall out.
"There's a lot of talk about the credit box, but the credit box is pretty big," Wind said. Policymakers "want lenders to provide more loans, but they are also hitting you over the head with enforcement actions."
