Lenders Waiting for FHFA to Act Before Boosting Credit
Banks and other lenders appear to be waiting on a regulatory signal from the Federal Housing Finance Agency before approving loans for borrowers with less than stellar credit profiles.
The wait-and-see approach has been reinforced by numerous lawsuits over past underwriting errors, as well as new mortgage regulations and a broken private-label securitization markets.
But lenders are hoping the FHFA will soon advance new policies that give them more confidence in making loans to a broader range of borrowers. FHFA Director Mel Watt indicated earlier this year that he would put a greater emphasis on making credit more accessible, fueling lender and consumer group expectations.
"We could really stimulate the housing market and increase homeownership if Mel Watt and this administration gave Fannie and Freddie a clear directive to start securitizing safe and sound loans," said John Taylor, president and CEO of the National Community Reinvestment Coalition in an interview.
That would "broaden the opportunity for people who have less than perfect credit or less than a 20% down payment."
Watt is widely seen as more concerned about credit availability than his predecessor Edward DeMarco, who was focused on reducing the market presence of Fannie Mae and Freddie Mac.
"I don't think it's FHFA's role to contract the footprint of Fannie and Freddie," Watt said May 13 in his first policy speech. "Our overriding objective is to ensure that there is broad liquidity in the housing finance market and to do so in a way that is safe and sound."
Banks, mortgage lenders, builders and others expect that Fannie and Freddie will soon provide more clarity on their buyback and lending requirements while reducing their guarantee fees to make loans more affordable.
Watt's comments about "expanding the credit box were very encouraging and pro-housing," said Richard Smith, the chairman and chief executive of Madison, N.J.-based Realogy Holdings during a conference call this week discussing earnings.
But Smith acknowledged it is taking time for the government to work through the process and make significant policy changes.
"The good news is that we know they have a desire to expand the credit box," he said. "When the first-time buyer comes back into the market in a big way, that will be upside for the industry. Eventually it will occur. It is just slower than we would have thought."
He also noted that Federal Housing Administration loans have become expensive, making it hard for first-timers to buy a home.
Sales of homes valued at below $300,000 fell 8% in the second quarter compared to the prior quarter, while sales of higher end homes rose, Smith said.
While traditional lenders feel boxed in by current underwriting guidelines, some private investors seem willing to take on more risks.
In discussing Ocwen Financial Corp.'s second-quarter results, Chairman William Erbey noted his servicing/lending company will be offering new loan products.
"We have recently received inquiries from major sources of capital to create mortgages that serve borrowers slightly below the prime lending standard," Erbey said July 31.
He cautioned that Ocwen is not interest in making loans that fall outside of the definition of qualified mortgage, a standard created by the Consumer Financial Protection Bureau that includes certain underwriting criteria.
"We do believe, however, there are innovative products that could safely serve this underserved market and would not violate the QM rule," he said.
Still, the Atlanta-based servicer/lender is not jumping into that market anytime soon.
"Clearly there is lots of work to do. We anticipate that it will be next year before this can become a meaningful opportunity," he said.
Nationstar Mortgage Holdings, meanwhile, is partnering with investors to offer non-QM refinancing products that would serve borrowers who don’t qualify for FHFA’s Home Affordable Refinance Program. (HARP allows underwater borrowers and other Fannie and Freddie borrowers with high loan-to-value loans to refinance at today's low mortgage rates.)
"It would be a product that is not offered today by any of the government programs," John Bray, Nationstar’s chief executive, said last week in discussing his company's second quarter earnings.
"You look at the landscape today. There are a ton of customers that are not being served," he said.
The Lewisville, Texas, company completed 6,000 HARP refinancings in the second quarter and 104,000 HARP refis since 2010.
"We feel comfortable" with the overall risk profile of the new refinancing products, the CEO said, noting that Nationstar will be originating the loans on behalf of investors and servicing the loans for investors. But he noted it is a new market. "We will go at that at a measured pace," he said.
A July survey of bank loan officers found that demand for prime loans increased since April and banks eased their credit standards on borrowers with strong credit profiles. But the Federal Reserve survey also found that lenders are wary of borrowers with debt-to-income ratios that exceed 43% because their loans may no longer qualify for QM status.
Pre-crisis lenders were willing go above a 43% DTI ratio and work with borrowers with blemished credit scores due to one-time events.
"But lenders are not willing to do that today because there is no investor willing to buy those loans," said Glen Corso, the executive director of the Community Mortgage Lenders of America.
There also is a "fear" within the industry that anyone who breaks from the ranks and eases their credit standards will suddenly be branded as a lender or insurer of "last resort" and become a magnet for lower quality loans.
"Nobody wants that title," Corso said.
NCRC's Taylor argues that banks have become so "addicted to securitization" that they won't originate mortgages for their own portfolios.
Meanwhile, the Structured Finance Industry Group has embarked on a project to "reinvigorate" the private-label residential mortgage-backed securities market.
Currently, private-label securitizations are generally confined to jumbo loans. The trade group released a set of industry securitization standards on Wednesday in an effort to create a broader range of private mortgages. These standards cover representations and warranties, due diligence and the roles of issuers, servicers and trustees.
Richard Johns, the executive director of the Wall Street group, said the paper also covers securities structuring issues, too. "It is our sweet spot in terms of expertise," he said.
But Johns stressed that there is still an "enormous amount of uncertainty around risk-retention" for non-QM loans and the RMBS disclosures required by the Securities and Exchange Commission.
In addition to "regulatory overhang," Fannie and Freddie have a funding advantage over private issuers, Johns said, which creates "some disincentives" for entering the private-label market.